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August 1993

A new form of partnership: the registered limited liability partnership. (CPA Manager)

by Rich, Bruce A.

    Abstract- The states of Texas and Delaware have enacted laws allowing general partnerships to reclassify themselves as registered limited liability partnerships (RLLPs). These statutes protect partners in an RLLP from liability for debts and obligations resulting from errors, omissions, incompetence, negligence or malfeasance committed by other partners or partnership agents who are not under the the supervision of the protected partner at the time of the act. The partners are not protected in cases when they have direct participation in the claimed act or when they have knowledge of the act during its occurrence but failed to take appropriate actions.

In August 1991, Texas revised the Texas Uniform Partnership Act ("TUPA") to permit partners of Texas general partnerships to be statutorily protected from the errors, omissions, and negligence of other partners by becoming a registered limited liability partnership ("RLLP"). In May, TUPA was further amended. The May 1993 amendments are effective January 1, 1994. In June 1993, RLLP legislation was passed by the Delaware state legislature which amends the Delaware Uniform Partnership Act to provide for the formation, registration, and regulation of Delaware RLLPs. The Delaware legislation is expected to be signed by the governor and is to be effective as of August 1, 1993. The following discussion of the TUPA and Texas RLLPs reflects the May 1993 amendments to TUPA and the Delaware RLLP legislation. Louisiana has enacted and other states (including Massachusetts, North Carolina, and the District of Columbia) are considering similar provisions. In addition, Minnesota has passed legislation which recognizes an RLLP formed in another state. Typically, general partners of partnerships are personally jointly and severally liable for the wrongful acts or omissions of their other partners. In contrast, a professional in a professional service corporation ("PC") usually does not (subject to certain exceptions) have personal liability for any negligence, wrongful act, or misconduct committed by his or her fellow shareholders while rendering professional services on behalf of the corporation.

The Texas and Delaware statutes provide that a general partnership organized under the laws of those respective states-may elect to become a registered limited liability partnership. A partner in a RLLP is not individually liable for debts and obligations of the partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of the partnership business (while the partnership is a RLLP) by another partner or a representative of the partnership not working under the protected partner's supervision or direction at the time the claimed act occurred, unless the protected partner 1) was directly involved in the specific activity in which the claimed act was committed or 2) had notice or knowledge of the claimed act at the time of occurrence and then failed to take reasonable steps to prevent or cure the claimed act. The Delaware statute states that a partner in a RLLP is not liable for debts and obligations of the partnership arising from negligence, wrongful acts, or misconduct committed in the course of the partnership business by another partner or an employee, agent, or representative of the partnership. The Delaware statute further provides that a partner in a RLLP remains liable for his own negligence, wrongful acts, or misconduct, or that of any person under his direct supervision and control.

Under both statutes, a partnership still remains an entity which can be sued for the acts or omissions of one of its partners, and the partnership assets would be a source for recovery by the plaintiff. In addition, the Texas RLLP law provides that a RLLP must carry at least $100,000 of liability insurance of a kind that is designed to cover the kind of act for which liability is limited by the RLLP provisions or must segregate cash or cash equivalents in such amount to satisfy any judgment for the kind of act for which liability is limited by the RLLP provisions. The Delaware legislation has a similar provision, except that it requires RLLPs to carry at least $1,000,000 of liability insurance or must segregate funds of at least that amount.

Both RLLP statutes cover all general partnerships, not just personal service partnerships. The Texas statute was originally introduced as an alternative means for allowing professionals the limitation of liability already available to them under the Texas Professional Corporation Act and the Texas Professional Association Act. Thus, the initial proposed amendment to TUPA applied only to certain kinds of professional partners such as physicians, architects, attorneys, CPAs, and veterinarians. However, the proposed bill was criticized as being discriminatory against non-professional partnerships and led to the broadening of the 1991 revisions to cover all partnerships. It should be noted that the statutory misconduct standard of "errors, omissions, negligence, incompetence, or malfeasance," was taken from the Texas Professional Corporation Act and the Texas Professional Association Act. From the effective date of the law through April 1993, approximately 900 partnerships registered as RLLPs in Texas, and it is estimated that approximately 90% of such RLLPs were partnerships of professionals. It should be noted that the Delaware statute provides that the ability of an attorney admitted to practice law in Delaware to practice law in a RLLP is determined by the Rules of the Supreme Court of Delaware.

A Texas RLLP is formed by filing an application with the Secretary of the State together with a fee of $200 for each partner. A Delaware RLLP is formed by filing an application with the Secretary of State together with a fee of $100 for each partner but the fee may not exceed the maximum annual corporation franchise tax. In addition, under the Texas and Delaware statutes, 1) the partners do not have to be listed, 2) the registration is renewed (and the fee is paid) annually, 3) there is no requirement to amend the registration during the year upon the admission or the withdrawal of a general partner. To ensure that third parties are aware of the limitation on liability, both statutes require the partnership name to include the words "registered limited liability partnership" or the abbreviation "L.L.P."

Under the Texas legislation, a partner is not protected if the wrongdoer co-partner or representative was 1) under his or her supervision or direction when the act occurred or if he or she was directly involved in the specific activity in which the alleged act was committed or 2) had notice or knowledge of such act at the time of occurrence. It appears that the Texas legislature intended the partner's direction or supervision of the alleged act to be "fairly specific" for a non-active partner to lose the protection. For example, a managing partner who exercises only general supervision over all partnership activity should not be found to be involved in the "direction or supervision" of every partnership activity.

In addition to Texas and Delaware, Louisiana has adopted RLLP legislation. In the last few months, bills authorizing the creation of RLLPs were introduced in the District of Columbia, Massachusetts and North Carolina and Minnesota recognizes a RLLP formed in Massachusetts. In addition, other states are considering the RLLP concept.

Brian L. Schorr is a partner at Paul, Weiss, Rifkind, Wharton & Garrison and is co-chair of The Association of the Bar of the city of New York and The New York State Bar Association Joint Drafting Committee of the Proposed New York Limited Liability Company Law. Mr. Schorr is the author of "Limited Liability Companies: Features and Uses," which appeared in the December 1992 issue of The CPA Journal.

Bruce A. Rich is partner at Reid & Priest and was active in the adoption of the New York Revised Limited Partnership Act.

The authors gratefully acknowledge the assistance of Deborah E. Proner, an associate at Paul, Weiss, in the preparation of this article and the comments of George W. Coleman of Jenkins & Gilchrist, P.C., Dallas, Texas, on an earlier draft of this article.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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