Why form a limited liability parnthership?

A limited liability partnership is an entity with the look and feel of a general partnership, but which has filed a statement of qualification with the state-filing officer.  The filing of this information gives notice to third parties of the structure of the partnership that allows those partners to make informed decisions as to their dealings with the partnership.

What does forming an LLP do for me?

Once your general partnership has filed the statement of qualification, or in some cases its called a registration statement, it becomes an LLP, and in most states it is provided with the same degree of personal liability protection which is offered to corporations and LLCs.  In a few other states, the formation of the LLP only provides a partial shield to partners, which only protects the innocent partners against tort and malpractice claims of their partners.  This shield does not however protect them from the contract claims of the business.

 

Example:

Imagine if Jane, Jan, and Joan are partners in interior decorating business, which has been formed into an LLP.  Joan is the one in charge of furnishing a large new home for one of their clients.  The client writes Joan a $50,000 check to provide them the funds necessary for purchasing the furniture and other furnishings, $5,000 of which was included as a partial payment of their fee for the job.  Instead of using the money properly Joan deposits the money in her own account and slips out of the country unnoticed.  Shortly thereafter the lease for the Partner’s office of $5,000 comes due.  Because Jane and Jan had planned on using the fee from the new job to cover the lease, they had already used their cash on hand to make payroll and pay other bills.

-If they are unable to cover their lease, and landlord serves them a complaint for default, the partnership will be liable for the default regardless of the wrong committed by Joan.

-If their client commences an action against them to recover the $50,000, the partial-shield protection of the LLP will protect them from the liability incurred by Joan.

 

In short, the partners have joint and several liability for the contract claims, but are protected from personal liability for the $50,000 stolen by Joan.

 

One important nuance to the formation of LLPs is that any contribution right, that existed in the partnership before the election of LLP status, is negated upon that election, but those rights can be reaffirmed or re-negotiated after the election by an amendment to the partnership agreement.

 

 

Photo by: Victor 1558