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If you are in the midst of making the choice between an LLP and a limited liability company in Delaware, you should be aware that a limited liability partnership (LLP) has both advantages and disadvantages. At Coddan, we are experienced in forming both types of business entities, and our LLP formation agents can help you to make the decision that is right for your new business. The members (partners) of an LLP don't have to be from the United States, so this structure is often the preferred option of non-US residents and organisations from overseas. However, a minimum of two people or corporate entities are required to register an LLP, whereas a limited liability company can just have one member. Unlike some other types of company in the United States of America, an LLP requires no predetermined level of capital. As long as all the members agree on a total sum, each member is only responsible for providing their contribution.
Perhaps the single biggest advantage associated with the LLP partnership structure relates to personal liability. Debts and tax are the responsibility of the limited liability partnership, and individual members (partners of an LLP) do not have to worry about risking their personal assets due to the LLP's liabilities. Because each LLP member in the States of Delaware is taxed on their income from the partnership, an LLP is eligible for a lower rate of corporation tax. However, if the LLP members are not resident of the USA and do not conduct business with or in the US, they are not obligated to pay tax int the United States of America.
Affordable Delaware limited liability partnership formation for non-US customers: many people outside of the USA routinely form Delaware LLPs in order to take advantage of the many tax benefits available. While this might seem slightly more complicated to do than if you were a US customer, at Coddan Ltd we can register a Delaware LLP for you as well as providing a range of other incorporation services to help you on your way. We offer four unique limited liability partnership start-up packages, each at a different price point and including different features, so you can choose the American LLP formation package which meets your requirements.
American LLP registration for overseas customers: establishing an LLP in the USA even if you are based outside of the United States is very simple, and at Coddan Ltd we can have your limited liability partnership set up within couple of hours. However, simply establishing your LLP is not all that we offer; our other services are often considered to be indispensable in ensuring that your Delaware LLP is established and run safely and legally, which gives you the peace of mind you need when registering a limited liability partnership in the USA.
Obviously, before you start trading with your US LLP partnership will need a business bank account. We can also provide you with a registered office address in the State of Delaware, and provide nominee members. We can also verify your corporate documents with an apostille authentication stamp. The number of services we can offer you as a non-US customer is huge, and their usefulness cannot be underestimated. To discuss your Delaware LLP registration options in greater detail or just to find out exactly how we might go about forming your LLP, don't hesitate to get in touch with Coddan Ltd - we're always happy to help to register an LLP for non-USA customers
LLP registration in Delaware for overseas customers: there are some key tax advantages involved in setting up an LLP in USA from a foreign country. However, forming an LLP whilst living abroad can be difficult and stressful. Thankfully, LLP registration for non-USA customers can be carried out by LLP formation experts. They will get your new LLP started whilst complying with all USA regulations, and they will usually provide a range of additional services in order to get your new limited liability partnership venture off to the best possible start. As well as lodging all the necessary information and documentation to the Secretary of State, LLP registration for overseas customers will often also include the setting up of a bank account - meaning your new LLP can start trading within hours. If you need an assistance with LLP formation in USA, you can also speak to our business advisors between 9.30am-6.00pm Monday to Friday by telephoning + (0) 207.935.5171 or + (0) 330.808.0089 (national rates).
Incorporate an LLP in USA: Delaware's strong history of preserving the freedom of contract is maintained in the Act. Section 15-1201 of the Act specifically provides "the rule that statutes in derogation of the common law are to be strictly construed shall have no application to this chapter." In addition, Section 15-103(d) of the Act states that "it is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements." In addition to the forgoing rules of statutory construction, the Act itself allows for a great amount of flexibility to modify the default provisions of the Act in a partnership agreement.
In fact, other than the relatively limited number of provisions of the Act that Section 15-103(b) of the Act provides restrictions on modifying, nearly all other provisions of the Act may be modified in the partnership agreement. Such flexibility allows for partners in the partnership agreement to, among other things, specifically address management of the partnership, distributions, voting rights and indemnification, in order to appropriately reflect the intentions of the partners.
The partners, in the partnership agreement, may also modify certain duties of partners to the partnership and other partners. Similarly, Section 15-103(e) of the Act offers additional protection to partners in stating that "a partner or another person shall not be liable to the partnership or the other partners or another person that is a party to or is otherwise bound by a partnership agreement for the partner's or other person's good faith reliance on the provisions of the partnership agreement."
Other advantages of Delaware general partnerships include the ability of, and relative ease with which, a partnership can merge and convert, as well as the ability of a partnership to maintain continuity notwithstanding changes in its partners.
Under the Act, an LLP is for all purposes a general partnership. However, as discussed below, by becoming an LLP, the partners of a Delaware general partnership are able to limit their liability. It is fairly simple to become an LLP. Under the Act, unless otherwise provided in the partnership agreement, the necessary approval to become an LLP is the same vote that is otherwise necessary to amend the partnership agreement or, in the case of a partnership agreement that expressly considers obligations to contribute to the partnership, the vote necessary to amend those provisions. For this reason, if a partnership is contemplating becoming an LLP it may be advisable expressly to approve such qualification, as well as to authorize one or more partners or other authorized persons to execute and make the filings necessary for the partnership to qualify and continue as an LLP (which are executed in the same manner as a Statement of Partnership Existence), in its partnership agreement.
In addition, to maintain its status as such, the LLP is also required to file an annual report with the Secretary of State of the State of Delaware by June 1 of each year following the calendar year in which the partnership initially files the Statement of Qualification. The annual report must state the name of the LLP, the number of partners of the partnership (the specific names of such partners do not need to be listed) and the address of the registered office and the name and address of the registered expert of the partnership in Delaware for service of process. An LLP is not required to make any filing, or amend a previous filing, due solely to changes in the number of partners of the partnership, as the annual reports are the only necessary filings to reflect such changes.
The Delaware principles, and Act provisions, relating to statutory construction, combined with the many flexible and beneficial provisions of the Act, enable a Delaware general partnership to adapt to the ever-changing needs of a business entity. And to the extent that advances in the law of general partnerships allow for more flexibility, Delaware general partnerships will be able to take full advantage with confidence that the Delaware courts will respect the provisions of partnership agreements.
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.
(a) A domestic partnership may be formed as, or may become, a limited liability partnership pursuant to this section.
(b) In order to form a limited liability partnership, the original partnership agreement of the partnership shall state that the partnership is formed as a limited liability partnership, and the partnership shall file a statement of qualification in accordance with subsection (c) of this section. In order for an existing partnership to become a limited liability partnership, the terms and conditions on which the partnership becomes a limited liability partnership must be approved by the vote necessary to amend the partnership agreement and, in the case of a partnership agreement that expressly considers obligations to contribute to the partnership, also the vote necessary to amend those provisions, and after such approval, the partnership shall file a statement of qualification in accordance with subsection (c) of this section.
(c) The statement of qualification must contain: (1) The name of the partnership; (2) The address of the registered office and the name and address of the registered expert for service of process required to be maintained by Section 15-111 of this chapter; (3) The number of partners of the partnership;
(4) A statement that the partnership elects to be a limited liability partnership; and
(5) The future effective date or time (which shall be a date or time certain) of the statement of qualification if it is not to be effective upon the filing of the statement of qualification.
(d) The status of a partnership as a limited liability partnership is effective on the later of the filing of the statement of qualification or a future effective date or time specified in the statement of qualification. The status as a limited liability partnership remains effective, regardless of changes in the partnership, until it is canceled pursuant to Section 15-105(d) of this chapter or revoked pursuant to Section 15-1003 of this chapter.
(e) A partnership is a limited liability partnership if there has been substantial compliance with the requirements of this subchapter. The status of a partnership as a limited liability partnership and the liability of its partners is not affected by errors or later changes in the information required to be contained in the statement of qualification under subsection (c).
(f) The filing of a statement of qualification establishes that a partnership has satisfied all conditions precedent to the qualification of the partnership as a limited liability partnership.
(g) An amendment or cancellation of a statement of qualification is effective when it is filed or on a future effective date or time specified in the amendment or cancellation.
(h) If a person is included in the number of partners of a limited liability partnership set forth in a statement of qualification, a statement of foreign qualification or an annual report, the inclusion of such person shall not be admissible as evidence in any action, suit or proceeding, whether civil, criminal, administrative or investigative, for the purpose of determining whether such person is liable as a partner of such limited liability partnership. The status of a partnership as a limited liability partnership and the liability of a partner of such limited liability partnership shall not be adversely affected if the number of partners stated in a statement of qualification, a statement of foreign qualification or an annual report is erroneously stated provided that the statement of qualification, the statement of foreign qualification or the annual report was filed in good faith.
(i) Notwithstanding anything in this chapter to the contrary, a domestic partnership having, or that but for its election in accordance with § 15-1206(c) of this chapter, would have had, on December 31, 2001, the status of a registered limited liability partnership under predecessor law, shall have the status of a limited liability partnership under this chapter as of January 1, 2002, and to the extent such partnership has not filed a statement of qualification pursuant to this section, the latest application or renewal application filed by such partnership under such predecessor law shall constitute a statement of qualification filed under this section. (72 Del. Laws, c. 151, § 1; 73 Del. Laws, c. 223, § 2; 75 Del. Laws, c. 50, §§ 26-29.)
The major advantage of a Delaware general partnership's becoming an LLP is that the partners are protected from the general rule of partner liability as stated above, and in this way are able to limit their liability. Under the Act, the obligations of the partnership incurred while an LLP, whether arising in contract, tort or otherwise, are solely the obligations of the partnership.
Under the Act, a partner of an LLP is not personally liable, directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for such an obligation of the LLP, solely by reason of being or so acting as a partner. In addition to relying on the Act for this limitation of liability, a statement to this effect should also be contained in the partnership agreement.
Of course, a partner may still have liability for its own actions or in accordance with the partnership agreement.
The intent of the Act is to offer similar limitations against personal liability to partners of an LLP that are afforded to managers and members of a limited liability company, limited partners of a limited partnership (and general partners of a limited liability limited partnership) and shareholders of a corporation, each as organized under the applicable Delaware statute.
A limited liability partnership, and a foreign limited liability partnership authorized to transact business in the State of Delaware, shall file an annual report with the Secretary of State which contains:
(1) the name of the limited liability partnership and the state or other jurisdiction under whose laws the foreign limited liability partnership is formed and the number of partners of the partnership; and
(2) the address of the registered office and the name and address of the registered expert for service of process required to be maintained by Section 15-111 of this chapter.
(b) An annual report must be filed by June 1 of each year following the calendar year in which a statement of qualification filed by a partnership becomes effective or a foreign partnership becomes authorized to transact business in the State of Delaware.
(c) On or before March 31 of each year, the Secretary of State shall mail to each partnership at its registered office set forth in the last filed statement of qualification or statement of foreign qualification or annual report a notice specifying that the annual report together with applicable fees shall be due on June 1 of the current year and stating that the statement of qualification or statement of foreign qualification of the partnership shall be deemed to be revoked unless such report is filed and such filing fee is paid on or before June 1 of the following year.
The Secretary of State shall not issue a certificate of good standing with respect to any partnership which has not filed an annual report and paid the required filing fee pursuant to this section. The statement of qualification or statement of foreign qualification of any such partnership that fails to file such annual report or pay such required filing fee on or before June 1 of the following year shall be deemed to be revoked.
(d) A revocation under subsection (c) only affects a partnership's status as a limited liability partnership and is not an event of dissolution of the partnership.
(e) A partnership whose statement of qualification or statement of foreign qualification has been revoked pursuant to subsection (c) may apply to the Secretary of State for reinstatement after the effective date of the revocation. The application must state: (1) the name of the partnership and the effective date of the revocation; and (2) that the ground for revocation either did not exist or has been corrected.
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 a lmited 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.
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.
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.
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.
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.
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 experts 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 co-partner'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 experts.
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, expert, 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.
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.
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.
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.
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: an 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.
LLP name requirements: LLPs generally must use a name including the words "limited liability partnership" or "registered limited liability partnership" or the abbreviations "LLP" or "RLLP."
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.
"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.
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.
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.