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 | Limited Liability Partnerships Information This information about LLPs is presented for educational purposes only. We suggest you talk to your attorney or accountant to see if this information would be beneficial to you and your business needs | |||||||
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THE LIMITED LIABILITY PARTNERSHIP (LLP) A limited liability partnership (LLP) has elements of partnerships and corporations. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. However, the partners have the right to manage the business directly, and (in many areas) a different level of tax liability than in a corporation. Limited liability partnerships are distinct from limited partnerships, in that limited liability is granted to all partners, not to a subset of non-managing "limited partners." As a result the LLP is more suited for businesses where all investors wish to take an active role in management. There is considerable confusion between LLP's as constituted in the US and that introduced in the UK in 2001 and adopted elsewhere since the UK LLP is, despite the name, specifically legislated as a Corporate body rather than a Partnership. UNITED STATES In the United States, each individual state has its own law governing their formation. Limited liability partnerships emerged in the early 1990s: while only two states allowed LLPs in 1992, over forty had adopted LLP statutes by the time LLPs were added to the Uniform Partnership Act in 1996. Although found in many business fields, the LLP is especially popular entity among professionals, particularly lawyers, accountants and architects. In some U.S. states (including California and New York), LLPs can only be formed for such professional uses. The liability of the partners varies from state to state. Section 306(c) of the UPA (a standard statute adopted by many states) grants LLPs a form of limited liability similar to that of a corporation: An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. However, a sizable minority of states only extend such protection against negligence claims, meaning that partners in an LLP can be personally liable for contract and intentional tort claims brought against the LLP. As in a partnership or limited liability company (LLC), the profits of an LLP are distributed among the partners for tax purposes, avoiding the problem of "double taxation" often found in corporations. Some US states have combined the LP and LLP forms to create limited liability limited partnerships. Limited liability partnership The Uniform Partnership Act (UPA) § 306(c) states "An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner." The inclination to collaborate to accomplish certain commercial objectives has a long history. The commercial magnetism of such collaborations and a need to govern their business ultimately led to the codification of corporate and partnership laws. Genesis and Development of Partnership Laws Corporations and Partnerships have been a primary form of business structure for a long time. For more than a century, partnership law has offered an all-embracing and lucid alternative to corporate law. Although, the two bodies of law have much in common, historically they have differed sharply on the role of the contract and private ordering in structuring the firm. Partnership law encourages private ordering through bargaining by providing an agreement among partners. In contrast, corporate law historically has provided a mandatory framework for firm structure highly resistant to shareholders’ attempts to define their relationships through bargaining. Proponents of private ordering within firms prefer the freedoms of partnership law to the mandates of corporate law, and over time they have enjoyed some success in extending the bargaining model from partnership law to corporate law. However, certain inherent limitations of both these forms of businesses make them unsuitable for certain businesses. This ultimately led to the evolution of certain hybrid forms of business structures such as limited partnerships, limited liability partnerships, limited liability limited partnerships etc. Concept of a Limited Liability Partnership A LLP is essentially a partnership with limited liability. It is a business entity akin to a body corporate having a legal personality separate from that of its partners and combines features of both companies and partnerships. The entity provides the internal flexibility of a partnership by allowing the partners to adopt whatever form of internal organization they prefer while at the same time limiting their liability with respect to the LLP to their individual contributions. While the LLP gives the benefit of limited liability to its partners, it does not shield them from legal liability arising from their own personal acts, which are not done for and on behalf of the LLP -- such partners continue to be personally liable for their own negligence and for other wrongful acts committed in their personal capacity. The LLP is formed by way of incorporation or registration under the governing law. The LLP being a creature of statute (similar to a body corporate) is upon incorporation, an entity that can potentially last indefinitely and can survive changes to its partners. Similar to a body corporate, all property and assets acquired by the LLP belongs to the LLP and not to its individual partners. Similarly all debts and obligations of the partnership arising due to contract, tort or otherwise are assumed by the LLP. In the event of winding up of the LLP, the assets of the LLP are available for distribution to its creditors. The partners are then liable to contribute to the assets of the LLP to the extent they have agreed to do so in the partnership agreement. Any surplus assets are distributed among the partners. The push for the creation of limited liability partnership grew from several factors, such as general increase in the incidence of litigation for professional’s negligence and the size of claims; the risk to a partner's personal assets, when the claim exceeds the sum of the assets and insurance cover of the partnership; the growth in the size of partnerships; increase in specialization among partners and the coming together of different professions within a partnership. However, the concerns centered on the fact that partners had unlimited personal liability irrespective of any fault or any degree of fault on the part of a particular partner and the partners generally. The level of protection that a limited liability partnership affords to its partners is an important factor that led to the proliferation of this form of business structure. Major professional and venture capital firms around the world prefer this form of business over the others. LLP Laws in the United States The idea for the LLP has been credited to a multiple person law firm from Lubbock, Texas, which led to the enactment of the first LLP statute in 1991. This was due to a reaction to the legal fallout from an economic calamity. The LLP was a direct outgrowth of the collapse of real estate and energy prices in the late 1980s, and the concomitant disaster that befell Texas’s banks and savings and loan associations which led the nation in failures during the 1980s. The US Federal Deposit Insurance Corporation (“FDIC”), having made huge payouts to depositors, did its best to recover some of its losses from those who were (or might arguably be) legally responsible for the losses. Of course, directors and officers of the failed financial institutions were pursued, but their personal assets were dwarfed by the size of the losses. Naturally, the FDIC looked in all directions for defendants who could provide more meaningful compensation for its losses, and its gaze fell on accountants and lawyers who had provided professional services to the failed institutions. Large accounting firms and law firms that had a relationship with the failed institutions were particularly inviting targets because, not only would they have liability insurance, but the personal wealth of their many partners would be available to help satisfy any judgment. If the FDIC could show that one member of a professional firm was guilty of wrongful conduct in their professional relationship with a failed financial institution, all members of the firm would be personally liable. This gave the FDIC considerable leverage in its negotiations with firms and their insurers where there was substantial evidence that one or more members of the firm had fallen short in discharging their professional duties or were parties to outright fraud. The enactment of Texas legislation allowed members of certain professions who were carrying on business as ordinary partnerships to register as LLPs. Once a firm was registered as a LLP, each partner was shielded from personal liability claims against the firm arising from any future malpractice of other members of the firm. The “Texas model” for LLP legislation has two key characteristics. Firstly, its liability shield only covers professional malpractice claims. Secondly, the liability shield does not protect a professional for personal malpractice, that is, where they were personally involved in the wrongful conduct or had direct supervisory responsibility over those who were personally involved in the wrongful conduct. After Texas passed its LLP legislation, most other states quickly followed suit. Today all 51 states have passed laws that permit the formation of a LLP. A limited liability partnership is considered as a special type of partnership that requires a special filing with the State where the partners operate. This partnership form offers all partners the right to participate in the management and the operation of a partnership without subjecting themselves to unlimited personal liability as is the case in general partnerships. However, if the special laws governing it are not precisely followed, they can be held as general partnership in a court of law. Moreover, if the partners want, the old partnership agreement can continue to govern the newly formed LLP. A partnership, especially a limited liability partnership, transacting business in any state other than the state of domicile is required to register with the Secretary of State of the foreign state as a foreign partnership and file a statement of foreign qualification. | ||||
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