Limited Liability Partnership (LLP)

A limited liability partnership is a partnership that has qualified, by filing with the state, for a statutory shield against its partners' personal liability for the firm's obligations. Section 901 of the Uniform Partnership Act provides that "a partnership may become a limited liability partnership pursuant to this section," which requires approval by the same vote or consent it would take to amend the partnership agreement, followed by delivering a statement of qualification to the state filing office. Everything else about the partnership stays where it was: the same partners, the same agreement, the same federal tax treatment. What changes is section 306. Without the election, all partners are jointly and severally liable for the partnership's debts; with it, those debts are the partnership's alone.

The statement of qualification is short. It names the partnership, gives the street and mailing addresses of its principal office and of an office in the state if there is one, names the registered agent and that agent's address in the state, and states that the partnership elects to become a limited liability partnership. That is the whole filing. It does not list the partners, their capital or their shares, and it does not have to be renewed to stay effective: the status "remains effective, regardless of changes in the partnership," until it is canceled or administratively revoked.

Section 306(c) carries the shield, and its wording sets the boundary precisely. A debt incurred while the partnership is an LLP "is solely the debt, obligation, or other liability of the limited liability partnership," and a partner "is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the limited liability partnership solely by reason of being or acting as a partner." The operative words are the last eight. What the election removes is liability that attaches because of the status of being a partner, which is the vicarious kind: the other partner's malpractice, the firm's lease, the firm's judgment creditor. It does not touch liability that attaches to a person for what that person did. A partner who commits malpractice is liable for it as the person who committed it, and the firm is liable alongside them, and the other partners are not. That distribution of risk is the reason professional firms use the form, and the SBA describes it in those terms: an LLP gives limited liability to every owner and protects each partner from being responsible for the actions of the others. Which professions may or must use the form, and what insurance or security for claims comes with it, are set state by state rather than by the uniform act.

Two provisions protect the shield from technicalities. Section 306(d) says the failure of an LLP to observe formalities relating to the exercise of its powers or the management of its business "is not a ground for imposing liability on a partner," which forecloses the argument that runs against poorly maintained corporations and LLCs. Section 901(e) adds that the status and the partners' protection "is not affected by errors or later changes in the information required to be contained in the statement of qualification." And section 306(e) handles the end: cancellation or administrative revocation of the statement does not affect the limitation on a partner's liability for a debt incurred while the statement was in effect. The shield attaches by reference to when the obligation arose, not to whether the filing is still current when the creditor sues.

The price is a restriction on paying the partners. Section 406 prohibits an LLP from making a distribution if, afterwards, the partnership would not be able to pay its debts as they become due in the ordinary course of business, or its total assets would be less than its total liabilities plus what would be needed to satisfy any superior preferential rights on dissolution. A partnership without the shield has no such rule, because its creditors have the partners to look to. Once the partners are out of reach, the statute substitutes a solvency test, and section 407 makes a partner who consents to a prohibited distribution without meeting the act's standards of conduct personally liable for the excess. That is the structural trade: in exchange for the shield, partners cannot take money out of a firm that cannot pay its creditors.

1. Start from an existing partnership. The election is something a partnership does, so there is a partnership first, whether or not the partners ever wrote anything down.

2. Get the partners' approval. The act requires the affirmative vote or consent needed to amend the partnership agreement, and where the agreement addresses contribution obligations, the vote needed to amend those provisions.

3. File the statement of qualification with the state, naming the partnership, its addresses, its registered agent, and the election itself.

4. The shield attaches to obligations incurred from then on. Debts the partnership already had are unaffected, and each partner's exposure to those is what it was before.

5. Test distributions against solvency. Before paying partners, confirm the firm can still pay its debts as they come due and that its assets cover its liabilities, because a partner who consents to a prohibited distribution without meeting the act's standards of conduct is personally liable for the excess.

An example of how the shield divides a loss. Four consultants practice together as an LLP. One of them makes an error on a client engagement and the client wins a $400,000 judgment naming both that partner and the firm. The firm's insurance pays $250,000 and its assets cover another $60,000, leaving $90,000 unsatisfied. The partner who did the work is personally liable for that $90,000, because the liability is hers directly rather than by reason of being a partner. The other three are not liable for any of it, though the value of their interests in the firm has fallen by the $60,000 the firm paid out. Had the four been operating as a plain general partnership, all four would have been jointly and severally liable for the whole $90,000, and the client could have collected all of it from whichever partner was easiest to reach.

Pros

• Every partner gets the shield, unlike a limited partnership where somebody has to be the exposed general partner.
• It is an election rather than a reorganization. The partnership, its agreement and its tax treatment carry on unchanged.
• The filing is short, and the status stays effective without renewal until it is canceled or revoked.
• Formalities are not a trap. The act expressly says failure to observe them is not a ground for imposing liability on a partner, and errors in the statement do not cost the protection.
• Liability incurred while the statement was effective stays shielded even if the statement is later canceled.

Cons

• It does not protect a partner from their own negligence or misconduct, which for a professional firm is the exposure that matters most.
• It is not retroactive. Obligations the partnership already had when it elected are outside the shield.
• Distributions become conditional. An LLP that cannot meet the solvency test may not pay its partners, and a partner who consents to a prohibited distribution without meeting the act's standards of conduct is personally liable for the excess.
• The form brings a registered agent, a filing and, in most states, a periodic report, none of which a general partnership needs.
• Availability and conditions vary by state, including whether particular professions may use it and what claims coverage is required.