In the 1990s, when law firms began to explode in size, and law and accounting firms were the target of multimillion-dollar lawsuits for malpractice, some launched by government regulators, lawyers got scared. As N. Scott Murphy recounts in the "Indiana Law Journal," attorneys expressed their fears with statements such as, "The actions of a partner you don't even know, working in an office on the other side of the country, could cost you your house and force your kids to go to public school." So attorneys lobbied state legislators, and a spate of laws were passed in most states, including Oregon, authorizing law firms to set up business as limited liability partnerships.
Limited Liability Partnerships
An LLP is a "partnership that limits the exposure of general partners to certain kinds of partnership liabilities," according to Lawyers.com. Under Oregon law, two or more people operating a professional service are allowed to set up an LLP. Oregon defines professional services to include attorneys, architects, accountants, chiropractors, dentists, landscape architects, psychologists, podiatrists and radiology technicians. It's easy to set up your law firm as an LLP -- you just register your firm with the Secretary of State's Business Registry office in Salem, Oregon and pay a small filing fee.
Law firms in Oregon and other states flocked to register as LLPs, since there was a strong upside and no downside. The 'Lectric Law Library website states, "the general theme of LLP legislation is uniform: LLPs provide partners with statutory protection from some or all partnership debts, obligations and liabilities." In short, if you're a partner in a law firm LLP, you have some of the same protections as people running a corporation. Most importantly, a malpractice suit against the firm can't reach your personal assets if the firm loses the case, at least in most situations. In addition, you retain the tax advantages available in a partnership.
Oregon is a so-called "second generation" LLP state. The "first generation" laws insulated law firm partners from malpractice caused by another partner in the firm. The exception -- you are still on the hook for your own negligence or the negligence of employees under your direct supervision. Oregon and other states extended protection in "second generation" statutes to also protect partners from torts -- negligent or intentional actions that cause injury to other people -- not involving malpractice as well as from the contractual liabilities of the firm.
The LLP laws are a great thing for lawyers in Oregon and for other professionals who qualify to form such a business. But is the shielding of lawyers from some types of traditional partnership liabilities good public policy? Murphy argues that the public costs of LLPs outweigh the benefits. He says that LLPs help breed malpractice by discouraging partners from closely monitoring co-partners. He also argues that LLPs shift the burden of attorney malpractice from the firm to the client, which is unfair. Finally, the firm can insure itself against malpractice but the client cannot.