Study Notes for Limited Liability Partnerships

Chapter Five: Limited Liability Partnerships

Definition of Limited Liability Partnership (LLP)

  • Limited Liability Partnership: A partnership structure that provides partners with protection against personal liability for wrongful conduct committed by other partners.

  • Formation is subject to compliance with state statutes.

Liability Protections in LLPs

  • Full Shield States:

    • States that offer full protection to partners in an LLP from personal liability, regardless of whether the liability arises from tort (wrongful acts) or contract (agreements).

  • Partial Shield States:

    • States where partners retain liability for contractual obligations but are not personally liable for obligations arising from tort.

  • Bulletproof States:

    • Another term for full shield states, indicating complete protection from liability for both torts and contracts.

Advantages of LLPs

  • Protection Against Unlimited Personal Liability:

    • Partners are protected from being personally liable for negligent acts or misconduct performed by other partners or representatives of the partnership business.

When Does the Protection of an LLP Not Exist?

  • Protection may not exist under the following circumstances:

    • If a partner supervised or directed the partner who committed the wrongful act of liability.

    • If the partner was directly involved in the act leading to liability.

    • If the partner had knowledge or notice of the wrongful act and neglected to prevent it (this varies by state).

Disadvantages of LLPs

  • Formation Requirements:

    • An LLP may only be established through strict compliance with legal statutes, which can make formation expensive.

  • Liability Limitations:

    • Although partners in LLPs are not personally liable for wrongful acts of co-partners, they maintain unlimited personal liability for other acts in partial shield states.

  • Insurance Necessities:

    • Some states necessitate the LLP to maintain certain insurance coverages.

  • Restrictions:

    • LLPs are often confined to specific professional firms (e.g., law firms, accounting firms).

  • Continuity Issues:

    • LLPs may experience lack of continuity compared to other business structures.

  • Financial Burdens:

    • Partners may face individual filing fees and annual reporting requirements.

Formation of LLPs and Expansion into Other States

  • The following six elements are typically necessary for forming an LLP:

    1. Name: The name of the limited liability partnership.

    2. Addresses: The addresses of the principal office in the state and the designated agent for service of process.

    3. Number of Partners: The total number of partners in the LLP.

    4. Effective Date: The date upon which the LLP formation becomes effective.

    5. Application Statement: A definitive statement saying, “The partnership elects to be a limited liability partnership.”

    6. Authorized Signature: Signature of an authorized partner is required.

Dissolution of LLPs

  • The dissolution process for an LLP is akin to that of general partnerships.

  • Renewal: LLPs typically must renew their applications or certificates with the state on an annual basis.

  • Consequences of Non-Renewal:

    • Failure to renew leads to reclassification as a general partnership, which is subject to the respective state's version of the Revised Uniform Partnership Act (RUPA).

  • Reinstatement: Some states, along with RUPA § 1003, permit reinstatement of LLPs that have been revoked due to failure in fulfilling annual report obligations once corrective actions are taken.

Taxation of LLPs

  • LLPs are treated as general partnerships for taxation purposes, with a crucial distinction:

    • Partners in LLPs do not bear personal liability for the negligence or misconduct of their partners.

    • In states offering full shield protections, partners also avoid personal liability for tort, contractual, or other partnership obligations.

Key Features of Limited Liability Partnerships

  • Liability Protection:

    • Partners in LLPs have no personal liability in any state for wrongful acts committed by co-partners.

  • Jurisdictional Consistency:

    • In almost all jurisdictions, LLP partners are not liable for wrongful acts of co-partners or partnership contractual obligations.

  • Individual Liability:

    • Partners retain liability for their own wrongful acts and any acts they control or supervise.

Additional Features of LLPs

  • Formation Requirements:

    • LLPs must be established by adhering to state statutes necessitating the filing of applications with appropriate state agencies.

  • LLP Agreement:

    • The partnership agreement can be either oral or written. In the absence of a defined agreement, distributions of profits, losses, management roles and control are shared equally among partners irrespective of their capital contributions.

  • Insurance Requirements:

    • Certain states mandate that LLPs possess insurance or comply with financial responsibility standards.

  • Dissociation Impact:

    • Not every instance of partner dissociation leads to termination and winding up of the partnership; often, the interest of a dissociating partner will be purchased.

  • Tax Status:

    • LLPs possess the pass-through taxation characteristic of general partnerships.

  • Business Structure Trend:

    • LLPs reflect a modern shift in business structures that afford members management capabilities while protecting them from personal liability.