A very recent development, the Limited Liability Partnership (“LLP”) is a form of business organization that is nearly identical to the LP in formation, liability and tax treatment. (See footnote i.) In an LLP, all partners (not just Limited Partners) have some limited liability for the debts and obligations of the partnership, and all partners (not just General Partners) have the right to directly manage the day-to-day activities of the partnership. The important distinction between the LP and the LLP is the limited liability afforded to all partners. The LLP must also register with the Office of the Secretary of State by filing a “Certificate of Limited Liability Limited Partnership” or “Statement of Qualification.”

An LLP is generally not a good option for a startup business. That is, there are rarely circumstances where new business owners would create an LLP instead of an LLC or corporation. An LLP is generally chosen by an existing partnership that wants to convert to a business with limited liability.

While LLP statutes are not uniform, all the states provide that LLP partners do not bear personal liability for obligations of the partnership arising from the malpractice (that is, “negligent or wrongful conduct”) of a co-partner or other person not under the partner’s supervision and control. The main thrust of the LLP movement is to insulate partners from “vicarious liability” (See footnote i.) arising from the professional malpractice of other partners. (See footnote ii.) One author has described the creation of the LLP as a means of protecting the family jewels! (See footnote iii.)

Minnesota took the lead in expanding this shield against personal liability for malpractice of others to include commercial liabilities, such as trade debt. (See footnote iv.) Following Minnesota’s lead, the trend in LLP statutes enacted after 1995 has been to expand liability protection for professionals to include the commercial debts and obligations of the LLP. As such, the LLP is particularly well-suited for business enterprises in which all investors desire to actively participate in the management of the partnership. The LLP is perhaps most effective and certainly the most prevalent form of business organization among professionals, especially attorneys, accountants and architects. Notwithstanding this shield against liability created by a partner, each individual partner of the LLP remains wholly responsible for their own malpractice, so the statutory trend does not deny an injured party from collecting damages directly from the professional who has erred in judgment.

The LLP has the same tax advantages and filing requirements of other partnerships; that is, LLPs retain “pass through” tax treatment, with income or losses reported on the partners’ federal individual returns, as noted above.

[1] I think of vicarious liability as “guilt by association.”

[i] Blair, supra, at 23. I have sourced some of my comments from J. William Callison’s excellent discussions on the subject. See J. William Callison, Unincorporated Business Entities: Federalism, Regulatory Competition, and the Limited Liability Movement: The Coyote Howled and the Herd Stampeded, 26 Iowa J.Corp.L. 951 (2001), andLimited Liability Partnerships & Limited Liability Limited Partnerships, available at http://www.lectlaw.com/files/buo04.htm.

[ii] Megan E. Mowrey, L. Stephen Cash and Thomas L. Dickens, An Examination of the Business Form Decision for Professional Service Firms, 28 Seton Hall Legis. J. 355, 358 (2004).

[iii] Walter W. Steele, Jr., How Lawyers Protect the Family Jewels…The Invention of Limited Liability Partnerships, 39 S. Tex. L. Rev. 621 (1998).

[iv] Kelly L. Jones, Law Firms as Limited Liability Partnerships: Determining the Scope of the Liability Shield: A Shield of Steel or Silk?, 7 Duq. B. L.J. 21, 25 (2005).

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