In prior editions of the Legal Update, we have written about the growth of the use of the Limited Liability Company, and its benefits, for the small business owner. For a start-up business, the LLC can be the perfect vehicle since it provides the desirable limitation of liability for its members, while preserving the pass-through tax benefits of a partnership. However, for professionals in an existing general partnership, converting to an LLC can be a bit “painful” since conversion may trigger a “taxable event” from the IRS perspective. Plus, the converting entity must notify third party creditors, and possibly amend contracts and leases (if permitted) to reflect the new entity. For professional general partnerships, there is a viable alternative. The Limited Liability Partnership (LLP) will provide a layer of insulation from liability non-existent in the general partnership. It is important to note, however, that for professionals, there is no limit on liability to professional malpractice. The insulation from liability that is afforded by an LLP includes protection from vicarious liability for the actions of partners or from those professionals not under your direct supervision and control. Plus, like the LLC, the LLP permits the “pass-through” taxation of a partnership.Converting to LLP from a general partnership is easy. Generally, all that is needed is the adoption of an amendment to any existing partnership agreement electing to convert to an LLP, and filing a one-page statement of qualification with the New Jersey Department of Treasury. In essence, without creating a new entity, the general partnership can transform into an LLP, without the rigors of third party notification or triggering any amendment or assignment requirements under contracts and leases.
James M. Maggio, Jr. , is a Partner at WJ&L, who practices in the Transactional Business and Corporate areas.
Editor’s Note: Taking some of our own advice, effective May 1, 2003 our law firm became a Limited Liability Partnership.