The Law of Corporations and Other Business Organizations

Lecture Notes

Introduction to Limited Liability Partnerships

1. In the mid-1990s several states introduced
legislation to allow the formation of the
limited liability partnership.
2. Every state in the United States has now
adopted statutes permitting the formation
of limited liability partnerships, although
the statutes vary significantly from state to
state.
3. Between 1998 and 2005, the number of
limited liability partnerships in the United
States increased dramatically.
4. Special provisions within the partnership
act of the state in which the limited liability
partnership is formed govern limited liability
partnerships.
5. Limited liability partnership statute provisions
generally address the following:
• The nature and extent of the protection
from personal liability afforded to the
partners
• Voting requirements to elect limited liability
partnership status
• Requirements for filing a statement of
qualification to become a limited liability
partnership
• The annual reporting requirements for
limited liability partnerships
• Liability insurance or segregated funds
requirements (in certain states)
6. The partners of the limited liability partnership
are also governed by their partnership
agreements, so long as the terms
of that agreement are not contrary to applicable
law.
Limitations on Personal Liability
7. Partners of limited liability partnerships in
states with partial shield statutes are shielded
from personal liability for partnership
obligations arising from the wrongdoing of
other partners, but they remain personally
liable for all other partnership obligations.
8. Partners of limited liability partnerships in
states with full shield statutes are not personally
liable, solely by reason of being a
partner, for any obligation of the partnership
incurred while the partnership is a limited
liability partnership. Partners usually
remain liable for obligations arising in
whole or in part due to their own negligence,
wrongful acts, errors, or omissions.
9. The Uniform Partnership Act (1997) and a
majority of the states have adopted the full
shield approach for limited liability
partnerships.
10. Several states require that limited liability
partnerships carry liability insurance covering
the partnership for errors, omissions,
negligence, wrongful acts, misconduct, and
malpractice to ensure that third parties who
are wronged by the limited liability partnership
will have some type of recourse if the
partnership has limited assets. In lieu of an
insurance policy, some states require the
limited liability partnership to maintain separate
funds in an amount required by law in
a trust or escrow to provide for the payment
of partnership obligations.
Formation and Operation of the Limited Liability
Partnership
11. Limited liability partnerships are formed
pursuant to state statutes, usually by an
election made by a general partnership.
12. State statutes generally require that the
same number of partners required to approve
an amendment to the partnership
agreement must approve the limited liability
partnership election.
13. The general partnership makes an election
to become a limited liability partnership by
filing a statement of qualification or similar
document with the secretary of state.
14. The limited liability partnership is governed
internally by a partnership agreement
similar to that of a general partnership. The
limited liability partnership agreement
should include language indicating that the
partnership is a limited liability partnership,
and outlining the limits on personal liability
afforded to the partners.
15. The limited liability partnership must qualify
to do business in any state in which it
does business, other than its state of domicile.
16. The limited liability partnership must be
dissolved pursuant to the partnership act of
the state of domicile in the same manner in
which general partnerships are dissolved.
Advantages and Disadvantages of Doing
Business as a Limited Liability Partnership
17. The limited liability partnership offers all
the advantages to doing business as a general
partnership, including management
flexibility, partnership taxation, and a diversified
pool of capital resources. In addition,
the limited liability partnership offers
the benefit of providing at least a degree of
protection from personal liability for all
partners.
18. The disadvantages to doing business as a
limited liability partnership are similar to
those of the general partnership, including a
lack of business continuity, difficulty in
transferring partnership interests, and a limited
capacity to raise capital for the partnership
business. In addition, limited liability
partnerships are subject to certain formalities
before beginning business. A lack of
uniformity in state statutes concerning limited
liability partnerships may also be a disadvantage
to partnerships that transact
business in several states.
Introduction to Limited Liability Limited
Partnerships
19. As of late 2011, more than half the states
had adopted statutes approving the formation
of limited liability limited
partnerships.
20. Limited liability limited partnerships are
governed by the statutes of the state of the
limited partnership’s domicile. Most states
that recognize the limited liability limited
partnership provide for that entity in their
limited partnership acts. The Uniform Limited
Partnership Act (2001) makes it relatively
simple for any limited partnership to
adopt limited liability limited partnership
status.
Partner Liability
21. As with limited partners, general partners
of limited liability limited partnerships are
protected from personal liability for the
debts and obligations of the partnership to
the extent provided by the limited liability
limited partnership agreement and state
statute.
22. In most states, no partner of a limited liability
limited partnership is personally liable
for debts and obligations of the partnership
solely by reason of being a partner. Both
general and limited partners usually remain
liable for obligations arising in whole or in
part due to their own negligence, wrongful
acts, errors, or omissions. It is important to
consult state statutes concerning the degree
of limited liability protection available to
partners.
23. In states that follow the Uniform Limited
Partnership Act (2001), limited partners
have no personal liability for the debts of
the entity, regardless of whether the entity
is a limited partnership or limited liability
limited partnership, and regardless of
whether the limited partner participates in
the management of the limited partnership
business.
Formation and Operation of the Limited
Liability Limited Partnership
24. In states that provide for the formation of
limited liability limited partnerships, that
entity is usually formed when a limited
partnership files an election to become a
limited liability limited partnership with the
secretary of state or other state authority.
25. The general and limited partners must approve
the limited liability limited partnership
election by a vote pursuant to state
statute.
26. The limited liability limited partnership
agreement is typically no different than the
agreement for limited partnerships, except
that it includes added language to clearly
indicate that it is a limited liability limited
partnership and to further define the limited
liability for partners.
Advantages and Disadvantages of Doing
Business as a Limited Liability Limited
Partnership
27. The advantages of doing business as a limited
liability limited partnership are much
the same as those of a limited partnership.
Limited liability limited partnerships offer
income tax benefits, relative transferability
of partnership interest, a relatively high de
gree of business continuity, and diversified
capital resources. Limited liability limited
partnerships offer the added advantage of
limited liability for both general and limited
partners.
28. Disadvantages to doing business as a limited
liability limited partnership include the
formalities and regulatory and reporting requirements
as well as legal and organizational
expenses. In addition, the fact that
the limited liability limited partnership is
not recognized in all states, and that state
law is not uniform for this entity, may be a
disadvantage for some business owners.
The Paralegal’s Role
29. Paralegals who work with limited liability
partnerships and limited liability limited
partnerships are often responsible for conducting
research, assisting with forming the
appropriate entity, and tracking ongoing
formalities.
Paralegals also assist with the filings required
at the secretary of state’s office to
form LLPs and LLLPs and to maintain
their good standing.
CASE BRIEFS
Kus v. Irving, et al., 736 A.2d 946 (Conn. 1999)
Purpose: This case, in which two partners of a
limited liability partnership are found to be not
responsible for damages caused by the wrongful
act of a third partner, illustrates the main advantage
to doing business as a limited liability
partnership.
Cause of Action: Negligence, wrongful acts,
and misconduct
Facts: This case involves a law firm that is operating
as a limited liability partnership. The
plaintiff, Margaret Kus, had hired one of the
partners of the law firm, Charles J. Irving, to
collect on a life insurance policy of her late husband.
Kus agreed to pay Irving a fee of 25 percent
of what he collected on the life insurance
policy before suit was filed and 33 percent of
any proceeds after suit was brought. According
to Kus, Irving received the $400,000 death benefit
on the life insurance policy before filing suit,
but proceeded to file a suit anyway to take a
higher fee. The plaintiff claimed that the defendants
Dubicki and Camasar, Irving’s partners,
were also guilty of negligence, wrongful
acts, and misconduct. Dubicki and Camasar
filed this motion for summary judgment dismissing
them from the lawsuit, indicating that
they had no personal knowledge of the case or
the dealings between Irving and Kus until after
the matter was concluded. Irving and Kus
claimed that as partners of a limited liability
partnership, they were protected by the limited
liability partnership laws from any personal liability
for any actions against their partner, merely
because they were partners.
Issue: Can partners of a limited liability partnership
law firm be held liable for the negligence,
wrongful acts, or misconduct of a partner when
they have no personal knowledge or involvement
in the matter from which the misconduct
arises?
Holding: No, except where the alleged wrongdoer
is under the partners’ “direct supervision or
control,” the partners of a law firm that is a limited
liability partnership may not be held personally
liable for the actions of the alleged
wrongdoer.
Reasoning: Since the two defendants shared no
benefit, did not have direct supervision or control
over Irving, and did not know about the
matter until after the funds were distributed,
they were protected from personal liability by
the governing limited liability partnership
statutes.