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Editorial 7 MIN READ

LLPs and LLLPs in 2017: an election, not a formation

Why law and accounting firms still file one form a year, and what the LLLP adds on top

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 4 sections
  1. What the election actually is
  2. Who files, and where
  3. Federal tax: the same Subchapter K you already knew
  4. Sources

n LLP is not a new entity. It is a ballot a pre-existing partnership casts with its home state, trading the RUPA default — that every partner is jointly and severally liable for the firm's obligations — for a statutory shield. You do not form an LLP. You form a partnership and then elect LLP status.

That distinction is doing a lot of work, and it explains most of what readers find confusing about the form.

What the election actually is

Under the Revised Uniform Partnership Act, a general partnership becomes a limited liability partnership by filing a statement of qualification with the Secretary of State under RUPA § 1001. The statement must name the partnership, give a street address, identify an agent for service, declare that the partnership elects LLP status, and include the name ending — "Limited Liability Partnership," "L.L.P.," or "LLP" — that the statute requires. Approval takes the vote "necessary to amend the partnership agreement" unless that agreement specifies otherwise. Nothing about the underlying partnership changes; the same partners, capital accounts, tax-year, and operating agreement carry forward. What changes is RUPA § 306(c): once the statement is on file, a partner is not personally liable, directly or indirectly, for obligations of the partnership — in tort, in contract, or otherwise — that arise while the election is in force.

The shield is the asset. Everything else is paperwork.

Delaware codifies the same mechanics at 6 Del. C. § 15-1001. A Delaware LP reaches the second tier — limited liability limited partnership — through 6 Del. C. § 17-214, which lets a domestic LP file a § 15-1001 statement of qualification on approval of all general partners and limited partners holding more than 50% of profits interests. Once filed, the general partners pick up the § 306(c) shield in addition to the limited partners' existing protection, and the entity's name must end in "Limited Liability Limited Partnership," "L.L.L.P.," or "LLLP." A domestic LP that was already operating in Delaware can make the election at any point. A newly formed LP can check the LLLP box from day one by filing the LP certificate and the statement of qualification together.

Who files, and where

Texas deserves primary credit for the form. The first LLP statute in the country was enacted in Texas in 1991, in the aftermath of the savings-and-loan crisis, when law and accounting firms representing failed thrifts watched partners who had never touched the files get sued personally for malpractice attributed to a few colleagues. Texas-style "partial shield" LLP statutes — protecting only against partner-on-partner vicarious liability arising from professional negligence — spread through the early 1990s. In 1996 the Uniform Law Commissioners amended RUPA to add the "full shield" variant; that is the version most states now use, including Delaware. California and a handful of other states still run a narrower version.

Texas today treats the LLP as a registration layered over a general or limited partnership, governed by Chapter 152 and Chapter 153 of the Business Organizations Code. The filing fee is $200 per general partner, due at initial registration and then again each year with the annual report required under § 152.806 (enacted by S.B. 859, effective January 1, 2016). The report must list the partnership's current principal office, registered agent, and the number of general partners used to compute the fee.

Delaware charges $200 to file the statement of qualification under § 15-1001, and an LLP or LLLP pays an annual LLP tax on a per-partner basis, due June 1, in addition to the $300 flat tax that attaches to every Delaware LP, LLC, and GP on the rolls. Miss the deadline and the late penalty is $200 plus 1.5% monthly interest — the same late structure that applies across Delaware's alternative entities.

California is the important exception. Under Corporations Code § 16101, a registered limited liability partnership must be a partnership "each of the partners" of which is licensed in one of five listed professions: architecture, public accountancy, engineering, land surveying, or law. A software studio, a consulting firm, or a commercial real estate venture cannot form a California LLP. It can form an LLC instead — except that California's LLC statute (Corp. Code § 17701.04(b)) bars licensed professionals from using the LLC. Lawyers, CPAs, architects, engineers, and surveyors in California are pushed into the LLP because the LLC is closed to them; everyone else in California is pushed into the LLC because the LLP is closed to them. This is why so many California law firms are "LLPs" and so few California construction companies are. The LLP still owes the $800 annual franchise tax on Form 565, like any other California partnership.

California does not have an LLLP statute of its own. Under Corporations Code § 15909.02, the state will recognize an LLLP formed under another state's law for purposes of registering as a foreign entity. That recognition does not cure the § 16101 licensing restriction — a Delaware LLLP owned by non-professionals that does business in California registers as a foreign LLLP and pays California tax, but a Delaware LLLP whose partners are all California attorneys is still doing business in California as an LLP equivalent and has to meet the professional-license requirements if the work performed is the practice of law in California.

Roughly half the states expressly authorize the LLLP by statute. Texas, Delaware, Colorado, Florida, Arizona, Nevada, and Georgia are the ones transactional lawyers see most often. A partnership planning to register in multiple states should check each foreign-qualification statute individually rather than assume the form travels.

Federal tax: the same Subchapter K you already knew

Neither the LLP election nor the LLLP election changes the entity's federal classification. A two-or-more-partner domestic partnership is classified as a partnership by default under Treas. Reg. § 301.7701-3 (the check-the-box rules), and the LLP statement of qualification is not a classification event. Partnership taxation under Subchapter K (IRC §§ 701–761) continues to apply: no entity-level income tax, all items pass through on Schedule K-1, and partners pay self-employment tax on their distributive shares subject to IRC § 1402(a)(13)'s narrow carve-out for limited partners. The carve-out's application to LLP partners who both work in the firm and hold a capital interest is the perennially live question; the IRS's position, consistent with Renkemeyer v. Commissioner, 136 T.C. 137 (2011), is that a partner who performs substantial services for the partnership does not qualify as a "limited partner" for § 1402(a)(13) purposes regardless of the state-law label. Service-partner earnings in a law or accounting LLP are self-employment income.

One structural note. Partnership debt is allocated among partners under IRC § 752 based on who bears the economic risk of loss. In a general partnership, partners have basis in their share of the debt because they can be pulled into it. In a full-shield LLP or LLLP, the § 306(c) shield means partners do not bear the economic risk of loss on the partnership's recourse debt, so what looked like recourse basis gets re-characterized as non-recourse under Treas. Reg. § 1.752-2 and allocated differently. For firms relying on debt-funded basis to deduct losses — real estate LPs converting to LLLP, in particular — this is the single change worth modeling before the election is filed.

The rule of thumb: if the partnership is service-based and the partners want the § 306(c) shield, file the LLP election, pay the per-partner fee, and calendar the June 1 renewal. If the entity is a limited partnership with a corporate general partner taking the § 306 downside anyway, the LLLP election is usually worth its marginal filing fee. If the partners are not licensed in one of the five professions and the entity will live in California, the form is not available at all, and the LLC is the answer — unless professional licensing also closes that door, in which case the client needs a different conversation than the one about entity choice.

Sources

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