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| Limited Liability Partnerships (LLPs) have become a hot topic among executives looking to maximize their after-tax income and minimize their liability exposure.
Some communications firms, particularly partnerships, may realize significant benefits by converting to an LLP.
However, if you currently do business as a corporation, the tax costs of converting may outweigh the advantages.
LLPs are similar to LLCs in terms of tax treatment.
Significantly, the liability protection is frequently limited only to liabilities arising out of malpractice committed by other partners.
A partner will not be shielded from liabilities arising from contracts or from malpractice committed by that partner or those he or she supervises.
The LLP form is often chosen by professionals in states with legislation that limits the ability of professionals to operate as LLCs.
Flow-through taxation and limited liability are the two greatest advantages of LLPs.
Partnerships can convert to one of these entities fairly easily. The conversion does not result in taxable gain, at least when the partners' or members' interests in the organization's capital, income, and loss remain the same after conversion.
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 Coddan is a Registered Agent for Delaware Corporations Limited Liability Companies and Limited Liability Partnerships. What is a Limited Liability Partnership?
A limited liability partnership (often called an "LLP") is a form of business organization that joins the other more traditional forms of business organization including corporations, partnerships, and limited partnerships. Also added recently has been the limited liability company (LLC). Like these other business forms, an LLP is a legally recognized entity, which is organized for the purpose of engaging in business. The LLP form of business organization offers certain unique advantages not available with the other forms of business organization. A form of general partnership that provides an individual partner protection against personal liability for certain partnership obligations.
The limited liability partnership (LLP) is essentially a general partnership in form, with one important difference. Unlike a general partnership, in which individual partners are liable for the partnership's debts and obligations, an LLP provides each of its individual partners protection against personal liability for certain partnership liabilities. Similar to limited liability company (LLC), limited liability partnerships (LLPs) are organized under state law and offer a degree of liability protection for individual partners. For Federal tax purposes, limited liability partnerships follow the same entity classification rules as limited liability company. A limited liability partnership may elect to be treated as a corporation by filing Form 8832. If no election is made, the limited liability partnership is treated as a partnership and files Form 1065.
Limited Liability Partnership is similar to Limited Liability Company: both are granted limited liability status under state statutes. Both are easy to organize in comparison to corporation formation. Both are treated as partnerships for federal tax purposes provided they do not elect to be treated as corporations by filing Form 8832. Both are relatively new forms of business entities compared to general partnerships, limited partnerships, and corporations. In many states, limited liability partnership and limited liability company statutes parallel each other in the way state franchise taxes are imposed.
- Delaware LLP Liability
In certain states, limited liability partnership laws differ from limited liability company laws in the degree of liability protection. In general, limited liability company and corporations limit the liability to an owner's investment in the business; plus the owner's individual negligence or malpractice. Limited liability partnership laws generally provide liability protection against the malpractice of other partners. However, a limited liability partnership partner may still be jointly and severally liable for the contractual debts of the business. Newer state limited liability partnership laws have extended liability protection to the partnership's contractual debts that exceed the value of the owner's investment interest in the limited liability partnership. However, many states require limited liability partnerships (LLPs) to obtain a certain level of liability insurance.
- Professional LLP (Limited Liability Partnership)
Many state statutes do not allow professional firms (such as, accounting practices, law firms, medical practices) to form an entity other than a general partnership. Many state accountancy rules mandate a general partnership as the only structure for the practice of accounting, which includes limited liability partnerships and not limited liability company.
- State Tax
Some states tax Limited Liability Partnerships as partnerships, and Limited Liability Company as corporations. State franchise taxes are higher for Limited Liability Company in certain states than for Limited Liability Partnerships.
- Limited Liability Partnership Formation
Existing partnerships in certain states can be converted to a limited liability partnership simply by amending their partnership agreement and registering as a limited liability partnership with the Secretary of State. Forming a limited liability company requires creating a new entity.
- Conversion to LLP Status
For Federal tax purposes, converting a general partnership into an limited liability partnership will follow the same rules as converting a general partnership into an limited liability company. The partnership does not terminate and the limited liability partnership continues to file Form 1065 as the same partnership. (IRS Letter Ruling 9448026).
- Who Can Use Limited Liability Partnership?
The states of Texas and Delaware have enacted laws allowing general partnerships to reclassify themselves as registered limited liability partnerships. These statutes protect partners in an RLLP from liability for debts and obligations resulting from errors, omissions, incompetence, negligence or malfeasance committed by other partners or partnership agents who are not under the supervision of the protected partner at the time of the act. The partners are not protected in cases when they have direct participation in the claimed act or when they have knowledge of the act during its occurrence but failed to take appropriate actions.
In 1991 Texas enacted the first LLP statute, largely in response to the liability that had been imposed on partners in partnerships sued by government agencies in relation to massive savings and loan failures in the 1980s. The Texas statute protected partners from personal liability for claims related to a copartner's negligence, error, omission, incompetence, or malfeasance. It also permanently limited the personal liability of a partner for the errors, omissions, incompetence, or negligence of the partnership's employees or other agents. By the mid-1990s, at least twenty-one states and the District of Columbia had adopted LLP statutes. In August 1991, Texas revised the Texas Uniform Partnership Act ('TUPA') to permit partners of Texas general partnerships to be statutorily protected from the errors, omissions, and negligence of other partners by becoming a registered limited liability partnership ('RLLP'). In May, TUPA was further amended. The May 1993 amendments are effective January 1, 1994. In June 1993, RLLP legislation was passed by the Delaware state legislature, which amends the Delaware Uniform Partnership Act to provide for the formation, registration, and regulation of Delaware LLPs. The Delaware legislation is expected to be sign by the governor and is to be effective as of August 1, 1993.
The following discussion of the TUPA and Texas LLP reflects the May 1993 amendments to TUPA and the Delaware RLLP legislation. Louisiana has enacted and other states (including Massachusetts, North Carolina, and the District of Columbia) are considering similar provisions. In addition, Minnesota has passed legislation, which recognizes an RLLP formed in another state. Typically, general partners of partnerships are personally jointly and severally liable for the wrongful acts or omissions of their other partners. In contrast, a professional in a professional service corporation ('PC') usually does not (subject to certain exceptions) have personal liability for any negligence, wrongful act, or misconduct committed by his or her fellow shareholders while rendering professional services on behalf of the corporation.
The Texas and Delaware statutes provide that a general partnership organized under the laws of those respective states-may elect to become a registered limited liability partnership. A partner in a LLP is not individually liable for debts and obligations of the partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of the partnership business (while the partnership is a LLP) by another partner or a representative of the partnership not working under the protected partner's supervision or direction at the time the claimed act occurred, unless the protected partner 1) was directly involved in the specific activity in which the claimed act was committed or 2) had notice or knowledge of the claimed act at the time of occurrence and then failed to take reasonable steps to prevent or cure the claimed act. The Delaware statute states that a partner in a RLLP is not liable for debts and obligations of the partnership arising from negligence, wrongful acts, or misconduct committed in the course of the partnership business by another partner or an employee, agent, or representative of the partnership. The Delaware statute further provides that a partner in a LLP remains liable for his own negligence, wrongful acts, or misconduct, or that of any person under his direct supervision and control.
Under both statutes, a partnership still remains an entity, which can be sued for the acts or omissions of one of its partners, and the partnership assets would be a source for recovery by the plaintiff. In addition, the Texas LLP law provides that a LLP must carry at least $100,000 of liability insurance of a kind that is designed to cover the kind of act for which liability is limited by the LLP provisions or must segregate cash or cash equivalents in such amount to satisfy any judgment for the kind of act for which liability is limited by the RLLP provisions. The Delaware legislation has a similar provision, except that it requires LLPs to carry at least $1,000,000 of liability insurance or must segregate funds of at least that amount.
Both LLP statutes cover all general partnerships, not just personal service partnerships. The Texas statute was originally introduced as an alternative means for allowing professionals the limitation of liability already available to them under the Texas Professional Corporation Act and the Texas Professional Association Act. Thus, the initial proposed amendment to TUPA applied only to certain kinds of professional partners such as physicians, architects, attorneys, CPAs, and veterinarians. However, the proposed bill was criticized as being discriminatory against non-professional partnerships and led to the broadening of the 1991 revisions to cover all partnerships. It should be noted that the statutory misconduct standard of 'errors, omissions, negligence, incompetence, or malfeasance,' was taken from the Texas Professional Corporation Act and the Texas Professional Association Act.
From the effective date of the law through April 1993, approximately 900 partnerships registered as LLPs in Texas, and it is estimated that approximately 90% of such LLPs were partnerships of professionals. It should be noted that the Delaware statute provides that the ability of an attorney admitted to practice law in Delaware to practice law in a LLP is determined by the Rules of the Supreme Court of Delaware. Filing an application with the Secretary of the State together with a fee of US$200.00 for each partner forms a Texas limited liability partnership. Filing an application with the Secretary of State together with a fee of US$100.00 for each partner forms a Delaware LLP but the fee may not exceed the maximum annual corporation franchise tax. In addition, under the Texas and Delaware statutes, 1) the partners do not have to be listed, 2) the registration is renewed (and the fee is paid) annually, 3) there is no requirement to amend the registration during the year upon the admission or the withdrawal of a general partner. To ensure that third parties are aware of the limitation on liability, both statutes require the partnership name to include the words "registered limited liability partnership" or the abbreviation "L.L.P."
Under the Texas legislation, a partner is not protected if the wrongdoer co-partner or representative was 1) under his or her supervision or direction when the act occurred or if he or she was directly involved in the specific activity in which the alleged act was committed or 2) had notice or knowledge of such act at the time of occurrence. It appears that the Texas legislature intended the partner's direction or supervision of the alleged act to be 'fairly specific' for a non-active partner to lose the protection. For example, a managing partner who exercises only general supervision over all partnership activity should not be found to be involved in the "direction or supervision" of every partnership activity. In addition to Texas and Delaware, Louisiana has adopted LLP legislation. In the last few months, bills authorizing the creation of LLPs were introduced in the District of Columbia, Massachusetts and North Carolina and Minnesota recognizes a LLP formed in Massachusetts.
| Description of service | Order Now | Basic Delaware LLP Formation Package - £289.00
Search name availability for your Delaware Limited Liability Partnership. A Delaware Limited Partnership incorporated within 24-48 hours. Preparation and filing of Certificate of Formation with state office. Our incorporation service and State filing fees. Certified Copy of the Certificate of Formation. A professionally-prepared 20 page Delaware LLP Agreement ready-for-signature by email (Word. format). Minutes or Consents Documentation of Organizational Meeting. | ORDER
| Classic Delaware LLP Formation Package - £364.00
One price includes: search name availability for your Delaware Limited Liability Partnership. Preparation and filing of Certificate of Formation with state office. A Delaware Limited Partnership incorporated within 24-48 hours.. Certified Copy of the Certificate of Formation. Delaware Resident Agent for 12 months. Registered Address in the State of Delaware for 12 months. Delivery Certified Copy of the Certificate of Formation is delivered as hard copy by post. A professionally-prepared 20 page Delaware LLP Agreement ready-for-signature (Word. format). Minutes or Consents Documentation of Organizational Meeting. All the documents mentioned above are only to be printed and signed.
Next Year Fees » £345.00 : Registered Address and Resident Agent Services, Annual Franchise Tax Report Preparation and Annual Franchise Tax Fee. | ORDER
| Basic Arkansas LLP Formation Package - £122.00
Search name availability for your Arkansas Limited Liability Partnership. An Arkansas Limited Partnership incorporated within 24-48 hours. Preparation and filing of Certificate of Formation with state office. Our incorporation service and State filing fees. Certified Copy of the Certificate of Formation. A professionally-prepared 20 page Arkansas LLP Agreement ready-for-signature by email (Word. format). Minutes or Consents Documentation of Organizational Meeting. | ORDER
| Classic Arkansas LLP Formation Package - £197.00
One price includes: search name availability for your Arkansas Limited Liability Partnership. Preparation and filing of Certificate of Formation with state office. A Arkansas Limited Partnership incorporated within 24-48 hours.. Certified Copy of the Certificate of Formation. Arkansas Resident Agent for 12 months. Registered Address in the State of Arkansas for 12 months. Delivery Certified Copy of the Certificate of Formation is delivered as hard copy by post. A professionally-prepared 20 page Arkansas LLP Agreement ready-for-signature (Word. format). Minutes or Consents Documentation of Organizational Meeting. All the documents mentioned above are only to be printed and signed.
Next Year Fees » £199.00 : Registered Address and Resident Agent Services, Annual Franchise Tax Authorised Person and Report Preparation and Annual Franchise Tax Fee. | ORDER
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- Limited Liability Partnership Names
Two or more individuals, corporations, partnerships, trusts, or other entities can join together to engage in business as an LLP. The owners of an LLP are called "partners". Partners essentially own the LLP much in the same way as partners own a general partnership and shareholders own a corporation. When an LLP engages in business activities, it is the LLP itself, which actually owns and operates the business from a legal sense.
- What Makes an LLP Unique?
The name of every partnership filed with the Corporations Division must end with the words registered limited liability partnership, limited liability partnership or the abbreviation L.L.P. or LLP. Professional limited liability partnerships can also include registered professional limited liability partnership, or professional limited liability partnership. Partnership names cannot include words indicating corporate status, i.e. incorporated, corporation or an abbreviation thereof. Additionally the name cannot include the word limited, apart from the required ending. For example Work Solutions Limited, L.L.P. would not be accepted for filing.
- Limited Liability - What is it?
An LLP can be organized to combine several of the best features of the others forms of business organization. An LLC provides its partners with limited personal liability for the obligations of the business. With a few exceptions, unless an LLP elects to be taxed as a corporation, its income is not taxed to the LLP, but is instead "passed-through" to the partners and taxed to them at their individual tax rates in the same manner as the income of a general partnership is taxed. The LLP form also allows great flexibility to its partners - not just in terms of who can be a partner and who can manage, but also in terms of the way the partners are allowed to "share" the profits, income, and equity of the LLP among themselves.
- Tax Treatment
Limited personal liability of the partners of an LLP means that in most situations the debts and obligations of the business engaged in by the LLP are not the personal responsibility of the partners - the debts and obligations of the business can only be paid from the income and assets of the LLP. Of course, if a business operated by an LLP has financial difficulties, each partner of the LLP could lose the amount of his or her investment in the LLP, as well as the equity built up in the business. Beyond this, however, no partner risks the loss of his or her other assets and income. The limitation on the personal liability of an LLP's partner works in the same way as the limitation on the personal liability of the corporation's shareholders and the LLC's members. Limited personal liability is not a characteristic of all forms of business organization, however. In a general partnership, each of the partners is personally liable for all of the debts and obligations of the business of the partnership. A partner risks not only the loss of his or her investment and the equity of the business, but also risks loss of his or her personal assets if the partnership is unable to satisfy its obligations out of partnership assets.
- Annual Reports
LLPs normally will be treated for tax purposes as partnerships. If an LLP wishes to be taxed as a corporation, it must affirmatively elect such treatment. Under IRS Proposed Regulations, LLPs would automatically be taxed as partnerships unless they elect otherwise.
In most cases, treatment of an LLP as a partnership for tax purposes will be the desired result. When an LLP is treated for tax purposes as a partnership it is called a "pass-through" entity. This is because the income or loss of the LLP's business is not taxed to the LLP but instead allocated among the partners (either in proportion to their ownership interest in the LLP or in other proportions agreed to by them) and then combined with the respective partners' other income and taxed to them separately on their individual income tax returns. On the other hand, if an LLP elects to be treated as a corporation for tax purposes, and not as an "S" corporation, the income of the LLP is subject to what is sometimes called the corporate "double-tax". The income is taxed once directly to the LLP and then taxed again when the partners receive distributions from the profits of the LLP. All registered limited liability partnerships must file an annual report on or before the last day of February. The report renews the registration and must include all information required or allowed in the original registration.
If the partnership renders professional services the report must identify all partners who render professional services in the Commonwealth and contain a certification that each partner who renders a professional service in the Commonwealth is duly licensed to do so. The annual report does not need to be accompanied by a certificate from the regulatory board. If the partnership fails to file the report when due or to pay the required fee, the Corporations Division may revoke the partnership's registration. Under such circumstances, the Corporations Division will notify the partnership at least sixty (60) days prior to the revocation date. The notice will be mailed to the principal office of the partnership as shown in Corporations Division records and specify the reports which have not been filed, the fees which have not been paid, and the effective date of the revocation. The revocation shall not be effective if the reports are filed or the fees paid prior to the effective date of the revocation.
- Comparison to "S" Corporation
Presently, many closely held businesses operate in the form of a Subchapter S corporation. Essentially, an "S" corporation is a corporation that elects to receive special tax treatment. Because it is a corporation, the shareholders of an "S" corporation have limited liability protection. What really makes the S corporation form of organization popular, however is that is not subject to the corporate "double-tax". Instead, an S corporation is treated for tax purposes more like a partnership, but with many important differences. Unfortunately, there are many rules and tax "traps" surrounding the structuring of S corporations that often limit their usefulness. One advantage of the LLP's is that they are not subject to these restrictive rules.
For example, the number and type of investors who can become shareholders in an S corporation is very restricted. An S corporation can have no more than 75 shareholders. Shareholders in an S corporation cannot be partnerships, other corporations, (unless the other corporation owns at least 100% of the stock of the S corporation, and the S corporation elects to be a qualified subchapter "S" subsidiary), most types of trusts, or non-US residents. LLPs are not subject to these limitations. Also, the shareholders of an S corporation cannot create different "classes" of ownership interests. LLP partners, however can vary allocations of ownership, profit sharing, voting rights, etc. in ways that allow for great flexibility. There are also a number of technical tax advantages, which members of an LLP can enjoy when the LLP is taxed like a partnership, which cannot be enjoyed by shareholders of an S corporation. Whether a business should be conducted as an LLP or as an S corporation requires the consideration of many factors that are often technical. Therefore, the decision is usually best made after consultation with an attorney and accountant.
- Is an LLP For Everyone?
Operation of a business as an LLP may not be appropriate for all situations. Careful consideration should always be given to the choice of business organization. The desired financial and managerial relationships among the investors, the potential liabilities of the business, and consequences of various tax treatments are factors, which must be considered. Nevertheless, LLPs will very often be a better choice than the partnership, limited partnership, or "S" corporation forms of business organization.
- Formation And Operation Of Limited Liability Partnerships
Filing Requirement. The various state limited liability partnership ("LLP") statutes require that a general partnership file a document in order to qualify as an LLP. This document is variously called a registration, application for registration or certificate of limited liability partnership, and its contents vary from state to state.
Filing Fees. LLP filing fees vary from state to state. Most states impose a flat annual registration fee but several, including Delaware, Illinois, Kansas, Pennsylvania and Texas, base the registration fee on the number of LLP partners.
Name Requirement. LLPs generally must use a name including the words "limited liability partnership" or "registered limited liability partnership" or the abbreviations "LLP" or "RLLP." The Ohio LLP statute uses the term "registered partnership having limited liability" to describe Ohio LLPs and mandates the use of the abbreviation "P.L.L."
Insurance Requirements. Several of the early LLP statutes, including those in Delaware, Georgia, Pennsylvania, Texas and Virginia, mandated that an LLP have insurance or an escrow account to cover liabilities as to which partners do not bear personal liability. More recent statutes typically do not mandate insurance, but instead leave insurance issues to the statutes specifically governing professions and occupations.
Foreign Qualification. Most LLP statutes permit the registration and qualification of foreign LLPs, and provide that the laws of the formation jurisdiction determine the LLP's internal affairs and the partners' liabilities for LLP debts and obligations. Several LLP statutes, including those in Delaware, Illinois, Iowa, Louisiana, North Carolina, Ohio, Texas and Virginia, do not address foreign LLP qualification. In these states there is a question concerning the liability rules that apply to LLPs registered under the laws of another state. Therefore, it is possible without a statutory declaration to the contrary that the laws of the state in which LLP debts and obligations arise will govern the partners' rights and obligations, and LLPs which do business in states that do not provide for foreign qualification should ascertain the nature and extent of partner liability under the foreign state's LLP statute.
In addition, states which limit the use of LLPs to, for example, professionals frequently do not recognize limitations on liability afforded by other states to "limited liability partnerships" not comprised of professionals or that otherwise fail to meet eligibility standards. Instead, such LLPs may be treated as non-LLP general partnerships for liability purposes.
- Liability Protection In Limited Liability Partnerships - Vicarious Liability
"First Generation" LLP Statutes. The original limited liability partnership statutes protected partners from malpractice claims resulting from a partner's negligence or malfeasance. These statutes provided protection against professional malpractice while leaving LLP partners jointly, or jointly and severally, liable for other partnership liabilities, debts and obligations. In addition, under the early LLP statutes partners continue to have a contribution obligation if a partner has an indemnification right against the partnership. While the early LLP statutes provide liability protection against malpractice claims pled as torts, it is uncertain whether they providebroader protection to cover malpractice-type claims pled under theories other than tort (e.g., breach of contract or breach of fiduciary duty). To the extent that liability is asserted on a contractual basis for conduct which could also be claimed to have been improper on a negligence theory (e.g., through the assertion of a breach of an implied warranty in a contract), it is reasonable to argue that all liability arising from such conduct is protected through LLP status. If the policy underlying LLP legislation is to protect partners in connection with certain types of conduct, conduct for which protection is afforded in one area (tort claims), should be afforded parallel protection in another area (contract claims based upon implied warranties). This conclusion is based on the use of the word "negligence" in LLP legislation, and on the argument that protection in an implied warranty contractual setting has been furnished through the use of the term "wrongful acts" in most LLP legislation.
"Second Generation" LLP Statutes. Subsequent LLP statutes attempt to resolve the issues of whether malpractice-type claims are based in tort or in contract and whether partners are liable on a negligent partner's indemnification claim. The statutes generally state that LLP partners do not bear personal liability for any partnership obligations or liabilities arising from the malpractice of a co-partner or other person not under the partner's supervision and control.
Several unresolved issues remain under the second generation LLP statutes. First, because general partners traditionally have joint and several liability for partnership obligations, the Uniform Partnership Act (UPA) does not contain any provisions concerning distributions made when the partnership is insolvent or which render the partnership insolvent. It is uncertain in the LLP context whether partner distributions made after partnership liability arises will be subject to a recontribution obligation. Further, if the courts impose a recontribution obligation, the boundaries of that obligation are uncertain. The Minnesota LLP statute addresses this issue and states that a partner is liable for two years with respect to distributions that would have been improper had the LLP been a corporation. The Colorado LLP statute states generally that LLP partners may not receive distributions to the extent that the LLP is insolvent and provides that LLP partners who receive wrongful distributions are liable for a six-year period.
Second, the effect of LLP statutes on other partnership liability sharing arrangements under the UPA and by agreement should be considered. Traditionally, partners in general partnerships share the risk of loss from malpractice liabilities. In many partnerships, a negligent partner would not be required to indemnify or reimburse the partnership for partnership losses resulting from the partner's negligence. Further, partners generally are entitled to be indemnified by the partnership for personal liabilities incurred due to the partner's negligence in the scope of the partnership business, and indemnified partners have a contribution right against the other partners. In states that have addressed the indemnification-contribution question, the LLP statutes change the result and leave the negligent partner to bear the personal cost of his or her malpractice without any right of contribution. To the extent that an indemnification right remains under UPA Sec. 18(b), a partner entitled to indemnification can recover only if the partnership has sufficient assets.
If partners in an LLP seek to retain a full or contractually limited contribution right, the partnership agreement must provide that right. Inclusion of a contribution right in the partnership agreement raises other issues. First, there is a question concerning whether it is possible to create a contribution obligation that is enforceable by the negligent partner but not by his or her creditors. If the partner is in bankruptcy, the trustee probably can enforce the contribution obligation. Otherwise, the answer is uncertain but the better conclusion is that creditors cannot enforce the contribution obligation unless they have third-party beneficiary status. Second, there is an issue as to whether the partners' contribution obligation should be limited in order to protect non-negligent partners from significant and potentially ruined judgments while making negligent partners whole with respect to less significant judgments. Third, recognizing that formal contribution agreements will increase a creditor's dispute settlement leverage, there is a question whether it is preferable to rely on less formal assurances that partners will provide for one another, and whether there are noncontractual means to establish a climate where partners can rely on such assurances. Finally, if partners use formal or informal contribution arrangements, there is a question concerning the circumstances under which contribution should be available. A common approach is that partners should contribute toward ordinary negligence judgments, but not toward judgments which involve a co-partner's gross negligence, willful misconduct, fraud, harassment, acts involving moral turpitude, misappropriation of assets, breach of fiduciary duty and other extreme acts. Finally, a lack of contribution rights or limited contribution rights should cause professional firms to reexamine the extent of their malpractice insurance.
Third, in the event there are insufficient partnership assets to pay all partnership obligations, there is an issue as to whether non-negligent partners may cause the partnership to use its assets to pay liabilities for which the non-negligent parties are jointly and severally liable (e.g., lease payments). If partnership assets are used to pay such liabilities, a negligent partner will more likely need to use his or her separate assets to pay the liability. Such conduct likely would raise substantial questions concerning the non-negligent partners' breach of their fiduciary duties of loyalty, good faith and fair dealing.
"Third Generation" LLP Statutes. Some of the most recent LLP statutes, including those enacted in Colorado, Maryland, Minnesota, New York, Oregon and Pennsylvania, avoid many problems remaining under the first and second generation LLP statutes by providing LLP partners with full protection from vicarious liability. The Colorado, Maryland, Minnesota, Oregon and Pennsylvania LLP statutes limit liability for all claims and are not limited to professionals. The New York LLP statute provides full protection but limits LLPs to professional firms. Effect of Vicarious Liability Protection on Firm Culture. A final issue concerns the effect of LLP status on firm culture and professional representation. An initial question is whether LLP status is fair for partners in practice areas which pose the highest risk of large malpractice judgments, (and which are typically the most lucrative for the partnership), such partners likely will "bear the liability risk alone, rather than share the risk with partners in less risky practice areas in which malpractice judgments are unlikely or are within the partnership's insurance limits and asset base. A related question is whether, and to what extent, partners who bear disproportionate loss risk should be compensated for that risk. A third question concerns the meaning of "direct supervision and control," and the effect of supervisory responsibility on non-negligent partners, including whether service on committees (e.g., management, opinion, recruiting, training, associate committees) creates a risk of liability; whether business generators, who have apparent supervisory responsibilities on many matters but who may not participate in the underlying work, have inordinate risk; and whether partners will be willing to supervise and train associates. A fourth question is whether LLP partners will be less willing to assist their co-partners on matters not within their complete control. A fifth question is whether LLP partners will take a less active role in policing their co-partners' erformance, since knowledge of nonperformance creates liability risk. All these questions pose the final question of whether changes in personal liability will affect the sense of common interest and cooperation that is a desirable part of firm culture and whether LLP partners will become isolated and independent economic units. All of these questions should be examined in light of the goals of the professional partnership: client representation and service.
- Direct Partner Liability In Limited Liability Partnerships
All limited liability partnership ("LLP") statutes provide that LLP partners will be personally liable for their own negligence or malfeasance. In addition, most LLP statutes provide that LLP partners are liable for the negligence, wrongful acts and misconduct of any person under the LLP partner's "direct supervision and control," although the statutory terminology differs in this regard. The various state LLP statutes do not define what is meant by "direct supervision and control," and this question is left to judicial interpretation. For supervisory liability to be imposed upon a LLP partner, both "supervision and control" must exist, and the mandated supervision and control must be "direct." It is probable that the LLP statutes contemplate immediate, close supervision and control by a LLP partner, rather than a casual level of supervision or control is contemplated. The direct supervision and control standard should require an intimate involvement in supervision and control in connection with actual work with respect to a matter, rather than mere responsibility for a matter or client. Thus, for example, a LLP partner in an accounting firm who is working on a day-to-day basis in supervising and directing the activities of an employee would appear to have liability exposure. On the other hand, the chair of a department in a law firm, the members of the governing body of law firm or the managing partner of a law firm, who have established general policy for their firms but who are not personally involved in a client representation would appear not to have liability exposure. Similarly, two LLP partners working on a matter independently of each other, neither of whom is viewed as supervising and controlling the other, should be able to argue that since they acted independently of each other, they should not be exposed to liability for the other's conduct.\13 However, the lack of authority on this issue creates risk, which likely will affect the actions of LLP partners.
- Limited Liability Limited Partnerships
A limited liability limited partnership ("LLLP") is a limited partnership, formed under the applicable state limited partnership statute, which specially registers and thereby provides liability protection to the general partners. Texas, Colorado, and Delaware expressly recognize limited liability limited partnerships.
- Taxation Of Limited Liability Partnerships And Limited Liability Limited Partnerships
Tax Classification as Partnership. Limited liability partnerships ("LLPs") should be based as partnerships for federal income tax purposes since they will lack the corporate characteristics of continuity of life, free transferability of interests and centralized management. No rulings have been issued concerning the tax classification of limited liability limited partnerships ("LLLPs"), and the tax classification of LLLPs will rely on the presence or absence of the free transferability characteristic. Generally, LLLPs will possess the corporate characteristics of limited liability and centralized management (unless the general partners own more than 20% of the interests), and will lack the continuity of life characteristic. Taxation on Conversion to Limited Liability Partnership. The Internal Revenue Service has ruled that registration of a general partnership as a LLP does not cause termination of the partnership. Method of Accounting - a LLP should be entitled to use the cash method of accounting if the LLP partners actively participate in the partnership business. Self-Employment Income - a LLP partner should be treated as a general partner for self-employment tax purposes and, therefore, generally will have self-employment earnings, or his or her distributive share of LLP income.
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£ 289.00
To incorporate a LLP in Delaware this package price includes (most popular for USA residents):
Search name availability for your LLP in Delaware
Delaware Resident Agent for 12 months
Helpful Resources