Case study: using a limited liability partnership as the entity of choice.

• Author: Ellentuck, Albert B.

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A NEW TYPE OF ENTITY THAT HAS APPEARED in the United States in recent years is the limited liability partnership (LLP) or registered limited liability partnership (RLLP). This entity is similar in many respects to the limited liability company (LLC). All states now have LLP statutes.

Differences Between LLCs and LLPs

LLPs are special general partnerships (or limited partnerships in some instances) that exist under state law. LLPs arose in response to the personal liability problems faced by partners in law and accounting partnerships as a result of the many malpractice claims related to thrift and financial institution failures in the early 1990s.

In some states, partners in an LLP are personally liable for the commercial and other general obligations of the partnership and for their own errors and omissions and the errors and omissions of persons under their supervision, but they are not liable for errors and omissions by their partners or by employees under another partner's supervision.

However, in most states, LLP partners have the same blanket liability protection as LLC members. LLP partners in these states are not liable for the commercial or other obligations of the partnership but remain liable for their own errors and omissions or those of employees under their supervision. (See the exhibit for a summary of the LLP liability protection available in each state.)

Because partners in an LLP generally enjoy a higher degree of limited liability than that enjoyed by partners in a general or limited partnership, many state statutes require LLPs to carry a specific amount of liability insurance. This amount can be as much as several million dollars.

The administrative burdens of converting an existing partnership to an LLP or adopting LLP status for a professional practice (for example, meeting the state board of accountancy rules) are minimal in comparison to converting to or forming an LLC.

Key Tax and Nontax Considerations

LLPs are general partnerships under state law with modifications regarding personal liability. (Limited partnerships can also be LLPs in some states.) Consequently, LLPs have the benefits as partnerships.

Formation: Unlike the formation of an LLC, which generally requires filing articles of organization and drafting an operating agreement, an existing partnership usually can become an LLP by filing a registration statement. No amendment of the agreement is otherwise required. While the fee for...