LLPs: a new form of organization.

• Author: Kanovsky, Sharon
• Position: Limited liability partnerships

Until recently, businesses (other than sole proprietorships) considered three forms of organization: C corporation, S corporation and partnership. Since the 1970s, the limited liability company (LLC) has been available. Even more recently, the limited liability partnership (LLP) business structure has become available. The use of limited liability structures has increased because they provide the best of both worlds:limited legal liability and passthrough tax treatment.

In many cases, businesses organize as a general partnership because of state regulatory requirements, precluding organization as a C or S corporation. However, there may be alternatives to a general partnership that provide virtually the same tax treatment. For example, in an LLC, the liability protection of a corporation is combined with the passthrough tax treatment of a partnership. However, because it takes a considerable amount of work to operate as an LLC (changing partnership agreements, forming a board of directors, appointing officers, etc.), it is not always desirable. Therefore, organization as an LLP (which does not have these disadvantages) should be considered.

LLPs are growing in popularity. Presently, Texas, Louisiana, Delaware, North Carolina and the District of Columbia have enacted LLP legislation, while several other states have introduced LLP legislation. The increasing popularity of LLPs has been in response to many recent questions and concerns regarding the appropriateness of traditional concepts of partner liability. An LLP permits the continued conduct of business in a partnership form while limiting certain of the traditional liabilities of a partner in a general partnership.

In an LLP, under certain circumstances and in connection with certain types of conduct and exposures, the liability of a partner or the partnership is no longer joint and several among the partners. This liability has been eliminated, relieving a partner of liability for the negligence, wrongful acts and misconduct of other partners and of partnership employees, agents and representatives. A partner will generally be personally liable only for his own conduct and the conduct of those under his direct supervision. In addition, the partner remains personally liable for any commercial debts of the partnership.

Although the specific liability protection is assured in certain states, the tax treatment is not. Mere registration as an LLP does not establish its Federal income tax...