Question Regarding Protection Of Debtor's General Partner Interest In A Limited Partnership
Interesting question from another attorney. The attorney had a client who wanted to form a business entity to hold a valuable piece of unencumbered real estate. The client and attorney are concerned about using a limited liability company, single or multi-member, because of the Ohmstead decision that jeopardizes LLC asset protection. The attorney and client are considering either a limited partnership (LP) with a LLC as the general partner or a limited liability limited partnership (LLLP) with the client acting individually as the general partner. The attorney is not concerned about a creditor attacking the client’s limited partnership share, but he is worried about the creditor trying to levy upon the general partnership interest. The concern is that the general partner owns one percent of the equity and that the general partner controls partnership decisions and management.
I don’t’ see a significant difference between the two options in terms of protecting the client’s general partnership interests if a creditor sues the partnership. An LLLP protects the general partner from personal liability for the partnership’s debts, and if the LP is used, the LLC entity, even a single member LLC, would act as a corporate shield against individual exposure to suits against the partnership.
In terms of the client’s protection against individual judgments I believe both solutions expose the client’s one percent equity interest as general partner. A LP with a multi-member LLC general partner would give better protection of the GP equity interest. The partnership agreement should be drafted to make sure that if the client’s individual creditors attack his GP interest the creditor will gain none of the GP management rights. The worst thing would be for the creditors to seize control of the GP interest and order partnership distributions or partnership dissolutions. The partnership agreement should make clear that a creditor could not become a substitute general partner or exercise management powers.
