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Editorial 6 MIN READ

LLP and LLLP in March 2022: the liability-in-the-middle forms

Why law firms still file a statement of qualification, and why an LP bothers to become an LLLP in Delaware

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. What an LLP actually is under RUPA
  2. Why law firms, accounting firms, and almost no one else
  3. The LLLP: a limited partnership that bolted on an LLP shield
  4. The CTA overlay: both forms are reporting companies
  5. When the middle forms are the right answer
  6. Sources

he LLP and the LLLP sit between a general partnership and an LLC on the liability ladder, and for most readers they will never be the right answer. They exist because specific professions needed a partner-level malpractice shield without leaving partnership tax treatment, and because a handful of limited partnerships want the general partner shielded from entity debt without a conversion to LLC. That is the entire use case.

What an LLP actually is under RUPA

An LLP is a general partnership that has filed a statement of qualification under Revised Uniform Partnership Act § 1001. You do not form an LLP from nothing; you have a partnership already, by operation of law or by agreement, and you elect LLP status by filing one page with the Secretary of State. Delaware's version, at 6 Del. C. § 15-1001, requires the partnership name, the registered office, the name and address of the registered agent, the number of partners at the time of effectiveness, and a statement that the partnership elects LLP status. The underlying partnership does not change. Same partners, same capital accounts, same tax year, same operating agreement. The liability rule changes.

Under RUPA § 306(c), a partner in an LLP is not personally liable, directly or indirectly, for an obligation of the partnership incurred while the partnership is an LLP, whether the obligation arises in contract, tort, or otherwise. That shield is the asset. In a plain general partnership the default is joint and several liability for every partner, including for a co-partner's malpractice. The LLP flips the default.

Two footnotes. The shield runs to partnership obligations, not to a partner's own malpractice; if you personally commit the tort, you still pay. And annual maintenance is real: in Delaware, the LLP must file an annual report under § 15-1003, and a lapsed filing turns the entity back into a general partnership for obligations incurred after the lapse. Most firms that forget find out in discovery.

Why law firms, accounting firms, and almost no one else

The LLP form was written for, and is still used almost entirely by, professional-service firms. The driver is the interaction between state professional-licensing regimes and the corporate-practice-of-law doctrine. In several states the LLP predates the PLLC as a permitted vehicle for practicing law or public accounting, and the LLP remains the default form in which partnerships of licensed professionals organize. Texas is the usual example: the practice of law is defined and regulated at Tex. Gov't Code Ann. § 81.101, and Texas attorneys who want a partnership form with a malpractice shield have historically registered as LLPs. That is why the signage in Houston and Dallas still reads Vinson & Elkins LLP, not Vinson & Elkins PLLC. New York requires the LLP route for professional partnerships and restricts Article 8-B registration to partnerships whose members are all licensed in the relevant profession.

For a non-professional business (a software company, a restaurant, a design studio), the LLP is almost never the right choice. Every state now has an LLC act, and the LLC gives you the same shield without the structural awkwardness of being a partnership for most purposes but not liability.

The LLLP: a limited partnership that bolted on an LLP shield

The LLLP is one step further in. A limited partnership already shields the limited partners, but the general partner remains personally liable for entity debts. The LLLP election closes that gap. Delaware handles it at 6 Del. C. § 17-214, which lets a domestic LP elect LLLP status by filing a § 15-1001 statement of qualification and adopting a name that includes "Limited Liability Limited Partnership," "L.L.L.P.," or "LLLP." The election can be built into the partnership agreement at formation or adopted later by all general partners plus limited partners holding more than fifty percent of the profits interest. Once on file, the GP gets the RUPA § 306(c) shield on top of whatever the LP agreement already provided. A natural-person GP no longer needs a shell LLC between herself and the fund.

The LLLP is meaningful only where it is recognized. Delaware recognizes it. California does not: the Franchise Tax Board states on its LLLP page that domestic LLLPs cannot be formed in California, though foreign LLLPs may register and pay the $800 minimum franchise tax. New York does not recognize it either, and Article 8-B limits LLP registration to professional partnerships. A fund that wants the LLLP wrapper and also wants a New York nexus has to form the LLLP in Delaware and register as a foreign entity in New York, then hope the home-state shield holds up under New York's internal-affairs case law on a tort claim. Most fund counsel will not promise that it does.

The useful LLLP cases cluster in two places: Delaware- or Texas- organized fund vehicles where the GP is a natural person or a thin entity that wants the extra statutory belt, and real-estate syndications where the sponsor does not want a separate GP LLC. Outside that, the LP-plus-GP-LLC remains the conventional answer.

The CTA overlay: both forms are reporting companies

Anything formed by filing a document with a Secretary of State sits inside the Corporate Transparency Act's definition of a reporting company at 31 U.S.C. § 5336. An LLP is formed by filing a statement of qualification. An LLLP is formed by filing the LP certificate plus the statement. Both are reporting companies unless they fit a statutory exemption (the large operating company test, the regulated-entity carve-outs, the inactive-entity test, and the rest).

The final rule is not out yet. FinCEN issued the Notice of Proposed Rulemaking on December 8, 2021, at 86 Fed. Reg. 69920, and the comment period has closed. The agency has signaled it intends to finalize later in 2022. Law firms organized as LLPs will not escape the regime by being partnerships; the CTA is entity-agnostic within its filing- based definition. Whether the "accounting firm" exemption at 31 U.S.C. § 5336(a)(11)(B)(xiii) will be read to cover law firms of various sizes is one of the open questions; we covered the comment fight in the ANPRM dissection.

For a firm weighing an LLP or LLLP election in 2022, the CTA is another maintenance line, not a reason to choose a different form. LLCs are equally in scope. Corporations are equally in scope.

When the middle forms are the right answer

The LLP is the right answer for a professional-services partnership in a state where practice in partnership form is restricted to the LLP, or where the partners want partnership governance under RUPA (fiduciary duties that default to the Uniform Act rather than LLC-act variants, consent thresholds the partners are used to, a decades-old partnership agreement they do not want to rewrite). For a new firm with no such baggage, a PLLC is usually simpler. The LLP's staying power comes from inertia and from a few state-specific restrictions that make it the only path in.

The LLLP is the right answer for an LP whose sponsor is willing to give up California and New York domestic recognition for one fewer layer of entity. That bargain makes sense for Delaware-based private funds, Texas real-estate syndications, and family partnerships where the general partner is a natural person who wants the statutory shield without interposing an LLC. For everyone else, the LP plus a GP LLC is still the conventional structure, and the conventional structure is right for almost every case.

If someone has proposed converting your general partnership to an LLP, two questions answer most of the doubt. Are the partners licensed professionals with malpractice exposure? Does the state require or heavily prefer the LLP form for that profession? Two yeses, file the statement and calendar the annual report. Anything else, and the LLC or PLLC is cleaner.

Sources

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