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Small business owners sometimes choose the organizational form of a limited liability partnership (LLP) for their business. An LLP is a type of general partnership that provides its general partners with limited liability for certain obligations of the partnership. It has the benefits of a partnership and limitations on liabilities. For example, partners in LLPs are not liable for the debts caused by the negligence of other partners.

What is an LLP?

An LLP is a partnership that limits the exposure of general partners to certain kinds of partnership liabilities. The characteristic that the LLP shares with the corporation is limited liability. Under the typical LLP law, a general partner in an LLP:

• Is not liable for the debts and obligations of the LLP arising from errors, negligence, wrongful acts, or misconduct committed in the course of the partnership's business by another partner or by an employee, agent, or representative of the LLP
• Is liable for the general obligations of the partnership
• Is liable for obligations arising from his or her own misconduct, and for obligations arising from the misconduct of a person over which he or she has direct supervision and control
• May be liable when the partner had notice or knowledge of misconduct by another partner or representative

Origin of LLPs

Under traditional partnership law, each partner has the power to bind the partnership. The partnership is liable for the wrongful acts of any partner acting in the ordinary course of the partnership's business. In addition, partners in a general partnership are personally liable for partnership obligations if the assets of the partnership are insufficient to satisfy them. Therefore, partners in a general partnership are subject to personal liability for the negligence of other partners. These rules developed when partnerships were small and partners were aware of each other's activities.

In the 1990s, several trends combined to increase the risks to which partners of a general partnership were exposed under traditional partnership liability rules, especially in law and accounting firms. Among these trends were:

• An increase in the number of partners in general partnerships
• An increase in the complexity of practice areas at larger general partnerships
• An increasing number of malpractice suits filed against larger general partnerships
• Escalating malpractice insurance costs
• The proliferation of claims with very high dollar values, such as claims brought by government regulators against law and accounting firms in connection with the savings and loan crisis

The limited liability partnership was conceived in the 1990s to address the needs of partners in light of these developments. The first limited liability partnership law was enacted in Texas in 1991. Almost all states currently have LLP laws.

LLP laws generally permit partners in professional general partnerships to shield themselves from liability for contractual obligations of the partnership, but hold them personally liable for their own negligent or wrongful acts and for the negligent or wrongful acts of individuals acting under their supervision or control. Partners are not liable for debts and obligations resulting from the negligence of other partners. Generally, rules applicable to general partnerships, including those that govern contributions, management, operation and dissolution, apply to LLPs.

State laws vary on the kinds of protections that they provide to partners in an LLP. Although the first Texas law shielded partners from personal liability only for partnership obligations arising from the malpractice of other partners, some more recent laws protect partners in LLPs from all partnership debts.

Registration and Tax Status

In some states, general partnerships are allowed to register with their secretary of state as LLPs, and limited partnerships are allowed to register as limited liability limited partnerships (LLLPs). LLPs are governed by the state law of general partnerships except where that law has been specifically amended for LLPs.

Partnerships which become LLPs should not face difficulty in maintaining their status as partnerships for federal income tax purposes. The only corporate characteristic that is addressed under LLP statutes is limited liability. Therefore, any partnership that is taxed as a partnership should continue to be so treated after it qualifies as an LLP.

If you have any questions about LLPs or whether your company should be an LLP, contact a Small Business Lawyer in your area.

Questions for Your Attorney

• If I am a law partner in a law firm, which is an LLP, and my firm is sued for malpractice, will I have to pay for any resulting judgment against the firm?
• If I am a partner in an accounting firm, which is an LLP, and the firm is sued for breach of contract, can I be held personally liable for a resulting judgment against the firm?
• Do LLPs have to pay any more federal taxes than regular general partnerships?

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