Chapter 5 - Limited Liability Partnerships
agreement (required/not required) for limited liability partnership
required; written agreement preferable (but can be oral, written, or implied)
reasons for most states, including Texas, not imposing the financial responsibility requirement
(1) RUPA does not require insurance and (2) other, similar business entities are not required to maintain such insurance
disadvantage of formation of limited liability partnerships
In "partial shield" states, partners still have personal liability for the partnership's debts and contractual obligations
full-shield ("bulletproof") jurisdictions
48 states (including Texas), D.C. - no personal liability for torts or other misconduct committed by other partners or the partnership; and, no personal liability for contractual or other obligations incurred by other partners of the partnership
disadvantages of formation of a limited liability partnership
A GP or LP must already exist and then be registered with state as an LLP; registration fees can be costly Texas requires LLPs, once registered, thereafter to file annual reports and pay annual fees Some states require LLPs maintain liability insurance
limited liability partnerships' deadline for filing annual report each year
June 1 of each year following the calendar year in which the limited liability partnership's application for registration took effect
Does registering a limited liability partnership create a partnership where none existed before?
No, the general partnership or limited partnership must already exist, and it can then register as a limited liability partnership with the state
partial-shield jurisdictions (Louisiana, South Carolina)
Partner has no personal liability for negligence of other partners; BUT partner does have personal liability for other partnership obligations, especially contractual obligations
limited liability partnerships' strong similarities to the operation of general partnership
Partners owe each other fiduciary duties Each partner of an LLP is an agent of the LLP, and thus can bind LLP by entering into contracts, hiring employees, etc.
General partnership: Partnership is always personally liable for
Partners' wrongdoing, partnership's obligations
To form a limited liability partnership in Texas, what must be filed with the SOS
Registration of a Limited Liability Partnership, form 701; registration fee of $200 per general partner; must thereafter file annual reports and pay annual per partner fee of $200
governing state law of limited liability partnerships
Revised Uniform Partnership Act (RUPA) recognizes LLPs, supplies default provisions where LLP agreements are silent, and imposes some mandatory terms state also regulates assumed/trade names, business licenses, and sales/unemployment/state income taxes
effect of a limited liability partnership's failure to file its annual report by May 31 of the calendar year following the year in which the report is due
TX Secretary of State will automatically terminate the limited liability partnership's registration
reinstatement of a limited liability partnership in Texas
TX SoS will reinstate an automatically terminated LLP registration within 3 years of the effective date of the termination if the business: files an application for reinstatement; files all past due annual reports; and pays the applicable fees
full-shield states in which absence of personal liability for debts/contractual obligations of partnership itself is actually unclear:
Tennessee, Michigan, New Hampshire, West Virginia
disadvantage of limited liability partnerships' continuity of existence
Texas requires LLPs, once registered, thereafter to file annual reports and pay annual fees
management of limited liability partnership
advantage: all partners can share in the management and control of the business without forfeiting limited liability
permissible business activity for limited liability partnerships in Texas
any for-profit business (if legal) is permissible
governing federal law of limited liability partnerships
applies in terms of federal income tax laws, anti-discrimination laws, OSHA regulations, etc.
A new partner in a limited liability partnership may be admitted by transfer...
as provided in the partnership agreement or, if agreement is silent on the issue, by consent of all existing partners
Texas RUPA governs
both general partnerships and limited liability partnerships
In some states, however, a partner in a limited liability partnership in a full-shield jurisdiction may still be liable for the misconduct of another if he or she...
directly supervised or controlled the partner who engaged in the wrongful act; was directly involved in the act giving rise to liability; or had knowledge or notice of the act giving rise to liability and failed to take reasonable steps to prevent or cure it
Terms of written partnership agreement are commonly very similar to general partnership agreement (oral agreements are also valid)
examples: amount of partners' contributions formula for determining profits and losses procedure for admission and withdrawal of partners conditions that will cause dissolution of the partnership
franchise tax
fee or tax imposed by Texas for the privilege of conducting business in the state
limited liability partnership (filing/non-filing entity)?
filing entity
Ownership advantages of a limited liability partnership
investors can participate in control of the business without incurring personal liability, except in "partial-shield" states, in which they will still be personally liable for the partnerships debts and contractual obligations) If additional capital is needed, new partners may be admitted to the partnership without fear of incurring full personal liability
Under Texas law, when a general partnership registers as a limited liability partnership...
it must contain in its name the term "limited liability partnership" or its abbreviation (LLP)
Under Texas law, when a limited partnership registers as a limited liability partnership...
it must contain in its name the term "limited liability partnership," "limited liability limited partnership," or an abbreviation of either (LLP or LLLP)
limited liability partnership: partner personal liability
liable for partner's own wrongdoing, not co-partner's wrongdoing, and in full-shield states, not partnership's obligations
In limited liability partnerships, all partners enjoy
limited personal liability.
permissible business activity for limited liability partnerships in some states
limited to providing professional services
in partial shield jurisdictions
no liability for other partners' wrongdoing, BUT still have liability for the business debts and contractual obligations
Limited partnership: limited partner personal liability
no personal liability for partners' wrongdoing or partnership's obligations
does every dissociation of a partner in limited liability partnership trigger dissolution and winding up?
no; if no dissolution is triggered, limited liability partnership will buy out the disassociating partner's interest
in full-shield states (including Texas), partners in a limited liability partnership have no personal liability for
other partners' wrongdoing debts and contractual obligations of the business
in partial shield states (including Texas), partners in a limited liability partnership have no personal liability for
other partners' wrongdoing, BUT they still have personal liability for debts and contractual obligations of the business itself
disadvantage of transferability of interest of limited liability partnership
partner can assign or transfer to a third party his "interest in the partnership", but that third party cannot participate in the management of the partnership business unless the other partners consent
Transferability of limited liability interests (similar to law of general partnerships)
partner in LLP may assign her "interest in the partnership" (right to distributions and profits) to another person; but partner cannot fully substitute another in her place as a partner because to do so would violate the voluntary nature of a partnership.
General partnership: Partner is always personally liable for
partner's own wrongdoing, co-partner's wrongdoing, debts and contractual obligations of the business
Limited Partnership: General partner always personally liable for:
partner's own wrongdoing, co-partner's wrongdoing, partnership obligations
Partner in a limited partnership always liable for
partner's own wrongdoing, co-partner's wrongdoing, partnership's obligations
in full-shield jurisdictions, which includes 48 states, including Texas, and D.C....
partners have no personal liability for either other partners' wrongdoing or business debts or contractual obligations
advantage of profits-losses allocation in limited liability partnership
partners share losses
disadvantage of profits-losses allocation in limited liability partnership
partners share profits
How partners in a limited liability partnership share profits and bear losses if agreement is silent
partners share profits and losses equally
problem for partners in limited liability partnerships that do business in both full-shield and partial-shield states
partners will experience uneven levels of protection against personal liability
limited liability partnership" partnership itself has liability for
partners' wrongdoing and partnership's obligations
limited partnership itself always personally liable for
partners' wrongdoing and partnership's obligations
Dissolution of limited liability partnerships (similar to that of general partnerships)
partnership agreement will likely set forth events that will cause dissolution if agreement is silent on this issue, RUPA will provide the default terms and conditions for dissociation and dissolution
Limited liability partnership
partnership in which no partner has personal liability for torts or other misconduct of another partner; and (in 49 jurisdictions, including TX) debts or contractual obligations of the partnership itself
federal income taxation advantage of limited liability partnerships
pass-through tax status
purpose of financial responsibility requirement of limited liability partnerships
protect injured parties who, if entity were a general partnership, would have been able to sue numerous partners for acts of negligence; in LLPs, by contrast, only LLP itself and the specific partner who committed the wrongful act are liable for the act, thus limiting the injured party to the limited liability partnership's assets and those of the wrongdoing partner
role of a paralegal with respect to the limited liability partnership
review state statutes regarding requirement for naming the LLP and any signals required for the name conduct research to determine whether the state affords full shield or partial shield protection and whether there are any insurance requirements in the state draft and file the original registration of limited liability partnership form with the secretary of state and/or renewal registrations draft the limited liability partnership agreement (often by modifying an existing general partnership agreement for use by an LLP file applications in any state in which the LLP wishes to conduct business as a foreign LLP file any required annual reports file certificates of termination or withdraw applications in states in which the LLP ceases to do business Review LLP written materials to be sure they comply with state requirements regarding the name designation
federal taxation of limited liability partnership
same taxation of general partnerships
New problem existing with Limited Partnerships
some investors want to participate in control of the business in which they invest to try to maximize the business profitability. However, exercising control over the business would cause the investors to lose their limited partner status. Instead, they would be treated as general partners with unlimited personal liability.
limited liability partnerships' financial responsibility requirement
some states (not Texas) require LLPs to maintain liability insurance or set aside funds to satisfy possible judgments against the LLP or its partners
In Texas, after the winding up process of a limited liability partnership is complete...
the LLP must file a Certificate of Termination of Domestic Entity with the secretary of state, and the LLP must also file a similar document in any other state where the LLP did business, as required by the laws of that state
In 49 jurisdictions (including Texas), no partner is personally liable for
the debts or contractual obligations of the partnership itself
limited liability partnerships are governed by
the law of the state in which they are formed
In limited liability partnerships, no partner is liable for
the torts of other partners
True or false: a limited liability partnership is an unincorporated business
true
Limited liability partnerships can be owned by
two or more human beings or other business entities
winding up of limited liability partnership
when LLP dissolves, it must wind up (liquidate) by: collecting LLP assets/debts satisfying any LLP obligations liquidating assets distributing assets to creditors distributing remaining proceeds to the partners if agreement is silent on distribution, it is equal