978-1133019145 Chapter 5 Solution Manual

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CHAPTER 5

Limited Liability Partnerships and Limited Liability

Limited Partnerships

THEME

Chapter 5 introduces students to limited liability

partnerships and limited liability limited partner-

ships, two of the newer limited liability entities

available in most states, focusing on the charac-

teristics of these two entities and how they differ

from the general partnership and the limited

partnership. Links to the partnership and limited

partnership acts of most states, along with cita-

tions to the limited liability partnership and lim-

ited liability limited partnership provisions with-

in those acts, can be found on the CourseMate

website that accompanies this text at

http://www.cengage brain.com.

CHAPTER GOAL

The goal of this chapter is for students to be-

come familiar with the following terms and

topics concerning limited liability partner-

ships and limited liability limited

partnerships:

• Limited liability partnership and limited lia-

bility limited partnership

• Differences and unique characteristics be-

tween general partnerships, limited liability

partnerships, limited partnerships, and lim-

ited liability limited partnerships

• State requirements for forming each of the

limited liability entities

• The nature and extent of the limited liability

afforded to all partners of a limited liability

partnership and limited liability limited part-

nership in states that have adopted either full

shield or partial shield statutes

• State requirements for limited liability

partnerships and limited liability limited

partnerships

• Advantages and disadvantages of doing

business as a limited liability partnership

compared to other forms of business organi-

zation

• Advantages and disadvantages of doing

business as a limited liability limited part-

nership compared to other forms of business

organization

SUGGESTED APPROACH

The law concerning limited liability partnerships

and limited liability limited partnerships varies

between the states, perhaps more than with any

of the other forms of business organization dis-

cussed in this text. It will be important for dis-

cussions here to focus on the law of the state

where students are located. Discussions may

focus on the amount of protection from personal

liability afforded to partners of these two types

of limited liability entities.

LECTURE NOTES

Introduction to Limited Liability

Partnerships

1. In the mid-1990s several states introduced

legislation to allow the formation of the

limited liability partnership.

2. Every state in the United States has now

adopted statutes permitting the formation

of limited liability partnerships, although

the statutes vary significantly from state to

state.

3. Between 1998 and 2005, the number of

limited liability partnerships in the United

States increased dramatically.

4. Special provisions within the partnership

act of the state in which the limited liability

partnership is formed govern limited liabil-

ity partnerships.

5. Limited liability partnership statute provi-

sions generally address the following:

CHAPTER 5 Limited Liability Partnerships and Limited Liability Limited Partnerships 33

service or otherwise on a password-protected website for classroom use.

• The nature and extent of the protection

from personal liability afforded to the

partners

• Voting requirements to elect limited li-

ability partnership status

• Requirements for filing a statement of

qualification to become a limited liabil-

ity partnership

• The annual reporting requirements for

limited liability partnerships

• Liability insurance or segregated funds

requirements (in certain states)

6. The partners of the limited liability part-

nership are also governed by their part-

nership agreements, so long as the terms

of that agreement are not contrary to ap-

plicable law.

Limitations on Personal Liability

7. Partners of limited liability partnerships in

states with partial shield statutes are shield-

ed from personal liability for partnership

obligations arising from the wrongdoing of

other partners, but they remain personally

liable for all other partnership obligations.

8. Partners of limited liability partnerships in

states with full shield statutes are not per-

sonally liable, solely by reason of being a

partner, for any obligation of the partner-

ship incurred while the partnership is a lim-

ited liability partnership. Partners usually

remain liable for obligations arising in

whole or in part due to their own negli-

gence, wrongful acts, errors, or omissions.

9. The Uniform Partnership Act (1997) and a

majority of the states have adopted the full

shield approach for limited liability

partnerships.

10. Several states require that limited liability

partnerships carry liability insurance cover-

ing the partnership for errors, omissions,

negligence, wrongful acts, misconduct, and

malpractice to ensure that third parties who

are wronged by the limited liability partner-

ship will have some type of recourse if the

partnership has limited assets. In lieu of an

insurance policy, some states require the

limited liability partnership to maintain sep-

arate funds in an amount required by law in

a trust or escrow to provide for the payment

of partnership obligations.

Formation and Operation of the Limited Li-

ability Partnership

11. Limited liability partnerships are formed

pursuant to state statutes, usually by an

election made by a general partnership.

12. State statutes generally require that the

same number of partners required to ap-

prove an amendment to the partnership

agreement must approve the limited liabil-

ity partnership election.

13. The general partnership makes an election

to become a limited liability partnership by

filing a statement of qualification or similar

document with the secretary of state.

14. The limited liability partnership is gov-

erned internally by a partnership agreement

similar to that of a general partnership. The

limited liability partnership agreement

should include language indicating that the

partnership is a limited liability partnership,

and outlining the limits on personal liability

afforded to the partners.

15. The limited liability partnership must quali-

fy to do business in any state in which it

does business, other than its state of domi-

cile.

16. The limited liability partnership must be

dissolved pursuant to the partnership act of

the state of domicile in the same manner in

which general partnerships are dissolved.

Advantages and Disadvantages of Doing

Business as a Limited Liability Partnership

17. The limited liability partnership offers all

the advantages to doing business as a gen-

eral partnership, including management

flexibility, partnership taxation, and a di-

versified pool of capital resources. In addi-

tion, the limited liability partnership offers

34 PART I Guide for Instructors and Answers to Chapter Review Questions

service or otherwise on a password-protected website for classroom use.

the benefit of providing at least a degree of

protection from personal liability for all

partners.

18. The disadvantages to doing business as a

limited liability partnership are similar to

those of the general partnership, including a

lack of business continuity, difficulty in

transferring partnership interests, and a lim-

ited capacity to raise capital for the partner-

ship business. In addition, limited liability

partnerships are subject to certain formali-

ties before beginning business. A lack of

uniformity in state statutes concerning lim-

ited liability partnerships may also be a dis-

advantage to partnerships that transact

business in several states.

Introduction to Limited Liability Limited

Partnerships

19. As of late 2011, more than half the states

had adopted statutes approving the for-

mation of limited liability limited

partnerships.

20. Limited liability limited partnerships are

governed by the statutes of the state of the

limited partnership’s domicile. Most states

that recognize the limited liability limited

partnership provide for that entity in their

limited partnership acts. The Uniform Lim-

ited Partnership Act (2001) makes it rela-

tively simple for any limited partnership to

adopt limited liability limited partnership

status.

Partner Liability

21. As with limited partners, general partners

of limited liability limited partnerships are

protected from personal liability for the

debts and obligations of the partnership to

the extent provided by the limited liability

limited partnership agreement and state

statute.

22. In most states, no partner of a limited liabil-

ity limited partnership is personally liable

for debts and obligations of the partnership

solely by reason of being a partner. Both

general and limited partners usually remain

liable for obligations arising in whole or in

part due to their own negligence, wrongful

acts, errors, or omissions. It is important to

consult state statutes concerning the degree

of limited liability protection available to

partners.

23. In states that follow the Uniform Limited

Partnership Act (2001), limited partners

have no personal liability for the debts of

the entity, regardless of whether the entity

is a limited partnership or limited liability

limited partnership, and regardless of

whether the limited partner participates in

the management of the limited partnership

business.

Formation and Operation of the Limited

Liability Limited Partnership

24. In states that provide for the formation of

limited liability limited partnerships, that

entity is usually formed when a limited

partnership files an election to become a

limited liability limited partnership with the

secretary of state or other state authority.

25. The general and limited partners must ap-

prove the limited liability limited partner-

ship election by a vote pursuant to state

statute.

26. The limited liability limited partnership

agreement is typically no different than the

agreement for limited partnerships, except

that it includes added language to clearly

indicate that it is a limited liability limited

partnership and to further define the limited

liability for partners.

Advantages and Disadvantages of Doing

Business as a Limited Liability Limited

Partnership

27. The advantages of doing business as a lim-

ited liability limited partnership are much

the same as those of a limited partnership.

Limited liability limited partnerships offer

income tax benefits, relative transferability

of partnership interest, a relatively high de

CHAPTER 5 Limited Liability Partnerships and Limited Liability Limited Partnerships 35

service or otherwise on a password-protected website for classroom use.

gree of business continuity, and diversified

capital resources. Limited liability limited

partnerships offer the added advantage of

limited liability for both general and lim-

ited partners.

28. Disadvantages to doing business as a lim-

ited liability limited partnership include the

formalities and regulatory and reporting re-

quirements as well as legal and organiza-

tional expenses. In addition, the fact that

the limited liability limited partnership is

not recognized in all states, and that state

law is not uniform for this entity, may be a

disadvantage for some business owners.

The Paralegal’s Role

29. Paralegals who work with limited liability

partnerships and limited liability limited

partnerships are often responsible for con-

ducting research, assisting with forming the

appropriate entity, and tracking ongoing

formalities.

Paralegals also assist with the filings re-

quired at the secretary of state’s office to

form LLPs and LLLPs and to maintain

their good standing.

CASE BRIEFS

Kus v. Irving, et al., 736 A.2d 946 (Conn. 1999)

Purpose: This case, in which two partners of a

limited liability partnership are found to be not

responsible for damages caused by the wrongful

act of a third partner, illustrates the main ad-

vantage to doing business as a limited liability

partnership.

Cause of Action: Negligence, wrongful acts,

and misconduct

Facts: This case involves a law firm that is op-

erating as a limited liability partnership. The

plaintiff, Margaret Kus, had hired one of the

partners of the law firm, Charles J. Irving, to

collect on a life insurance policy of her late hus-

band. Kus agreed to pay Irving a fee of 25 per-

any proceeds after suit was brought. According

to Kus, Irving received the $400,000 death ben-

efit on the life insurance policy before filing suit,

but proceeded to file a suit anyway to take a

higher fee. The plaintiff claimed that the de-

fendants Dubicki and Camasar, Irving’s part-

ners, were also guilty of negligence, wrongful

acts, and misconduct. Dubicki and Camasar

filed this motion for summary judgment dis-

missing them from the lawsuit, indicating that

they had no personal knowledge of the case or

the dealings between Irving and Kus until after

the matter was concluded. Irving and Kus

claimed that as partners of a limited liability

partnership, they were protected by the limited

liability partnership laws from any personal lia-

bility for any actions against their partner, mere-

ly because they were partners.

Issue: Can partners of a limited liability partner-

ship law firm be held liable for the negligence,

wrongful acts, or misconduct of a partner when

they have no personal knowledge or involve-

ment in the matter from which the misconduct

arises?

Holding: No, except where the alleged wrong-

doer is under the partners’ “direct supervision or

control,” the partners of a law firm that is a lim-

ited liability partnership may not be held per-

sonally liable for the actions of the alleged

wrongdoer.

Reasoning: Since the two defendants shared no

benefit, did not have direct supervision or con-

trol over Irving, and did not know about the

matter until after the funds were distributed,

they were protected from personal liability by

the governing limited liability partnership

statutes.

REVIEW QUESTIONS

1. How do limited liability partnerships differ

from general partnerships?

Limited liability partnerships offer their

36 PART I Guide for Instructors and Answers to Chapter Review Questions

service or otherwise on a password-protected website for classroom use.

2. Where in the state statutes is law governing

limited liability partnerships generally

found?

3. In states that follow the UPA 1997, what

information must be included in a state-

ment of qualification to elect limited liabil-

ity partnership statutes?

• The street address of the partner-

ship’s chief executive office and, if

• The name and street address of the

• A statement that the partnership

Some states require limited liability

partnerships to maintain liability insur-

ance or segregated funds to ensure that

third parties who are wronged by the

5. What is the difference between partial

shield statutes and full shield statutes?

Partial shield statutes protect partners

from personal liability only from debts

and obligations arising from the miscon-

duct or wrongdoing of their partners.

Full shield statutes protect partners

from personal liability for all debts and

obligations of the partnership, except

those caused by their own misconduct or

wrongdoing.

6. If a partnership formed in a partial shield

ment of funds by one partner, who will be

responsible for paying the partnership debt

once the partnership assets have been ex-

hausted?

7. Why might a limited liability limited part-

not recognized in all states, and there is a

8. In states that follow the ULPA 2001, how

is an election made to form a limited liabil-

nership certificate that is filed with the