Limited Liability Partnerships (LLP) and Limited Liability Companies (LLC)
by Thomas V. Bennett

Massachusetts law authorizes the conduct of business as a limited liability partnership ("LLP") or limited liability company ("LLC"). Used properly, these forms of business may offer significant liability and tax advantages over other business entities.
 

An individual can conduct a business as a sole proprietor or as the sole shareholder of a corporation. Two or more people may form a general partnership or may operate as a corporation. Generally, the decision to operate as a corporation rather than as a sole proprietorship or a general partnership depends upon concerns about personal liability.
 

Personal liability for business debts can usually be restricted by incorporating under Internal Revenue Code Subchapter S or under Subchapter C. The form which is selected will depend upon the number of business owners and their federal income tax objectives. To preserve the protective shield of the corporation, however, the business must be managed in strict compliance with corporate niceties, including careful documentation by preparing and maintaining minutes of directors' and shareholders' meetings.
 

If the business owns real estate, personal liability has been thought to be limited by transferring title to the property to a limited partnership or to a nominee trust with beneficial ownership either in a joint venture or in a partnership. However, there may be problems with these approaches to limiting personal responsibility for business liabilities. For real estate interests, nominee trusts have been held not to operate as liability shields while limited partnerships can be unwieldy.
 

Into this organizational and tax potpourri come the LLP and LLC. The LLP offers a highly attractive alternative to a traditional partnership. An LLP is a simple liability shield similar to a corporation. There is a $500 filing fee which must be paid each year. For entities currently doing business as partnerships, the decision to become an LLP is basically a "no-brainer." The tax and organizational status of the organization remain the same. The change to an LLP simply provides protection similar to what can be obtained by purchasing a liability insurance policy.
 

An LLC also offers significant advantages, although where limiting liability is the most important objective using a corporation may still be the safer course. An LLC can be used by a business person who wants to run the company but needs investors. Its practical use is in situations where a limited partnership might also be appropriate. A limited partnership has a general partner, who has personal liability for debts and losses, and limited partners who do not. In an LLC, a manager, like a general partner, runs the company and members own interests in the company, similar to limited partners. However, in an LLC, unlike a limited partnership, all of the parties have limited liability for business losses and debts.
 

Because the LLC can be taxed as a partnership, it is the perfect vehicle for obtaining the tax advantages of a partnership, but having the organizational flexibility of voting and nonvoting ownership interests and the limitation of liability of the corporate form of doing business. As with the LLP, there is a filing fee of $500 which must be paid each year.
 

Massachusetts was one of the last states in the country to authorize LLC's and LLP's. Elsewhere, these entities have only existed for a few years. Consequently, the courts have had little opportunity to determine the extent of the liability protection afforded by LLP's and LLC's. For that reason, some caution is warranted. A corporation may still be the preferred choice for a business entity if protection against liability is important.

If you have questions regarding this or any legal matter, please contact Thomas V. Bennett at tvb@barronstad.com or (617) 531-6574.