A limited liability partnership (LLP) is a general partnership that has registered with its state under the state partnership statute, so that its partners are not personally liable, solely by reason of being partners, for the obligations of the partnership, including obligations created by another partner’s negligence. The shield stops at the partner’s own hands: a partner stays fully liable for wrongful acts that partner commits, and in some states for those of anyone under that partner’s direct supervision. The firm’s debt itself survives the shield, payable out of partnership assets, and a partner can still become personally liable for one by agreement or by guarantee. An ordinary general partnership needs no filing to exist at all, while an LLP exists only from the moment its filing takes effect.
How a Partnership Becomes an LLP
A general partnership needs no paperwork and no intent. Under Delaware’s partnership act, the association of 2 or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership (Delaware Code, 6 Del. C. § 15-202(a)).
An LLP is the other way around, and the filing is not the whole of it. To form a Delaware partnership as an LLP from the start, the original partnership agreement must state that it is formed as one. For an existing partnership to become one, the terms and conditions on which it becomes a limited liability partnership must be approved by the vote necessary to amend the partnership agreement, and only after that approval does the partnership file a statement of qualification (6 Del. C. § 15-1001(b)).
The status then takes effect on the later of the filing of the statement of qualification or a future effective date or time specified in it (6 Del. C. § 15-1001(d)). New York calls the filing a registration and lodges it with the department of state (New York Partnership Law § 121-1500(a)).
The filing does not create a new firm. A limited liability partnership continues to be the same partnership that existed before the filing of a statement of qualification, and it is for all purposes a partnership (6 Del. C. § 15-201(b) and § 15-202(a)).
What a Limited Liability Partnership Shields, and What It Does Not
The shield covers the firm’s obligations, including ones another partner created, and stops at the partner’s own conduct. New York writes both halves into a single section, and the rest of that section says what the shield leaves standing.
No partner of a registered limited liability partnership is liable or accountable, directly or indirectly, for any debts, obligations or liabilities of the partnership, whether arising in tort, contract or otherwise, incurred while it is a registered limited liability partnership, solely by reason of being such a partner, acting in that capacity, or rendering professional services (New York Partnership Law § 26(b)).
The carve-out sits in the next subdivision. Each partner, employee or agent of a registered limited liability partnership is personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or her, or by any person under his or her direct supervision and control, while rendering professional services on behalf of the partnership (New York Partnership Law § 26(c)).
So the partner who did the work is still exposed, and so is the partner who directly supervised the person who did it. The other partners are not liable simply for being partners.
Two things keep money at risk even so. The first is the partnership itself. Subdivision (b) does not affect the liability of a registered limited liability partnership out of partnership assets for partnership debts, obligations and liabilities (New York Partnership Law § 26(e)). The claim is still a claim, and the partnership’s own assets answer for it.
The second is agreement. All or specified partners of a registered limited liability partnership may be liable in their capacity as partners for all or specified debts of the partnership to the extent at least a majority of the partners have so agreed, and nothing in the section impairs a partner’s ability to act as a guarantor or surety for those debts or to provide collateral for them (New York Partnership Law § 26(d)). A partner who personally guarantees the office lease is liable on the guarantee, and the shield has nothing to say about it.
Without the filing the default runs the other way. In Delaware partners are liable jointly and severally for all obligations of the partnership, unless the claimant agrees otherwise or the law provides otherwise, and a person admitted as a partner into an existing partnership is not personally liable for any obligation of the partnership incurred before that admission (6 Del. C. § 15-306(a) and § 15-306(b)).
Who May Form One
Eligibility depends on the state, and two states show the range. Delaware sets no professional gate at all: a domestic partnership may be formed as, or may become, a limited liability partnership under the statute (6 Del. C. § 15-1001(a)).
California puts a closed list in its Corporations Code. Professional limited liability partnership services means the practice of architecture, the practice of public accountancy, the practice of engineering, the practice of land surveying, or the practice of law, and architecture counts as one only until January 1, 2034 (Cal. Corp. Code § 16101(a)(14) and § 16101(b)).
A firm that does not itself practice can still qualify in California through the related-partnership route. A partnership related to a registered limited liability partnership that practices public accountancy qualifies if it provides services related or complementary to that firm’s professional limited liability partnership services, or provides services or facilities to it (Cal. Corp. Code § 16101(a)(8)(A)(iii)). Partners open one by filing an Application to Register a Limited Liability Partnership with the Secretary of State (California Franchise Tax Board, Limited liability partnership).
New York writes its restriction into the statute itself, and it is looser than it first looks for a multistate firm. The registering firm must be a partnership without limited partners, and it qualifies if each of its partners is a professional authorized by law to render a professional service within the state, or if each partner is a professional and at least one of them is so authorized. A partnership without limited partners holding a license, certificate, registration or permit issued by the licensing authority under the education law may register, and so may a related limited liability partnership (New York Partnership Law § 121-1500(a)).
LLP, LP and LLC
A limited partnership (LP) splits its partners in two. A limited partner is not liable for the obligations of a limited partnership unless he or she is also a general partner or, in addition to exercising the rights and powers of a limited partner, participates in the control of the business, and a limited partner who does participate in control is liable only to persons who transact business with the limited partnership reasonably believing, based on that partner’s conduct, that he or she is a general partner (6 Del. C. § 17-303(a)).
A general partner is in a different position. Except as the chapter provides, a general partner of a limited partnership has the liabilities of a partner in a Delaware partnership governed by the older uniform partnership law, to persons other than the partnership and the other partners (6 Del. C. § 17-403(b)). An LLP has no such split, and its shield is not conditioned on staying out of management.
An LLC is a different form under a different act, and it is not a partnership at all. Under California’s limited liability company act a limited liability company is an entity distinct from its members (Cal. Corp. Code § 17701.04(a)).
For a California accounting practice that route is closed. Nothing in the limited liability company title shall be construed to permit a domestic or foreign limited liability company to render professional services in the state (Cal. Corp. Code § 17701.04(e)). Professional services there means any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act (Cal. Corp. Code § 13401(a)). Public accountancy sits inside that code, since permits to engage in the practice of public accountancy in the state are issued by the board only to holders of the certificate of certified public accountant issued under that chapter and to partnerships, corporations and other persons registered with the board (Cal. Bus. and Prof. Code § 5070(a)).
How Is an LLP Taxed?
By default it is taxed as a partnership, and the default can be changed. A business entity that is not classified as a corporation under the regulations is an eligible entity, meaning one that can elect its own classification for federal tax purposes, and unless the entity elects otherwise a domestic eligible entity with two or more members is a partnership (eCFR, 301.7701-3(a) and 301.7701-3(b)(1)(i)). So the firm pays no income tax of its own and each partner reports a distributive share on a personal return.
An LLP that elects instead to be classified as an association is a corporation for federal tax purposes, the split described in c corp vs s corp. The Code sections behind partnership treatment, the information return the firm files and the Schedule K-1 each partner receives are in pass-through entities, and why a partnership return carries no federal income tax liability of its own is in federal income tax liability.
Accountably places trained offshore tax preparers and accountants inside US CPA and EA firms, and a firm can run a block of its own partnership return work through a trial task before any client file depends on it.
