Formation of an LLP

by David Carnes
Limited liability partnerships are limited to licensed professionals.

Limited liability partnerships are limited to licensed professionals.

Jupiterimages/Creatas/Getty Images

Under a traditional general partnership arrangement, each partner faces unlimited liability for all of the partnership's debts. If the partnership is composed of personal service professionals such as doctors or lawyers, this means that one partner can be sued for another partner's malpractice. Limited liability partnerships eliminate this liability.

Features

In an LLP, as in a general partnership, each partner faces unlimited liability for the partnership's business debts -- a creditor can sue any partner for all of the debt. An LLP partner also faces unlimited liability for his own malpractice or other wrongful acts. An LLP partner is not liable, however, for malpractice or other wrongful act committed by another partner, or by an employee or other representative of the LLP. The only exception to this liability protection is when one partner is aware of another partner's wrongful act and fails to respond appropriately. All partners in an LLP must be licensed professionals.

Registration

An LLP must be registered with the state before it can enjoy limited liability. Although registration regulations vary by state, they typically require the LLP to file a short document that lists its name, its federal employer identification number, its principal office address and a description of its business ("providing legal services," for example). It must also appoint a registered agent to receive legal documents, and list her name and in-state street address. The filing fee varies from state to state.

Foreign Qualification

Many states require an LLP registered in another state but doing business in-state to register as a "foreign LLP" before the state will recognize limited liability. In many states, foreign registration simply involves filing a standard registration document and indicating that the LLP was formed in another state. A filing fee applies. The LLP statutes of some states allow a foreign LLP to conduct in-state business under the laws of the state that formed it. If an LLP does business in another state without foreign qualification, state courts may treat it as a general partnership with unlimited liability.

Insurance Requirements

Some states require LLPs to carry insurance that covers malpractice and related liability, or to post a cash bond to cover such liability. Texas, for example, requires LLPs to be named in the policy -- it is not enough for individual partners to carry insurance. State laws require a minimum dollar amount of coverage. If the insurance requirement is not met, each partner may face the unlimited liability of a general partner.