Convert Your Limited Partnership into a Limited Liability Limited Partnership

The Texas Legislature made several changes to the Texas Business Organizations Code (BOC) that become effective September 1, 2011. Several of these changes deal with limited liability partnerships. I have, until now, not advised my clients to make use of the limited liability partnership provisions in the BOC because of their administrative difficulties and questionable liability protections. Those impediments have been removed. So, I am now advising my limited partnership and general partnership clients to take advantage of the limited liability partnership provisions unless the annual filing fees prove to outweigh the liability protections offered to LLPs and LLLPs.

Details of Law Changes

Before September 1, 2011, the Texas Business Organizations Code (BOC) required limited liability partnerships, as a condition to their registration, to provide evidence of $100,000 of liability insurance or a $100,000 cash deposit, bank letter of credit or insurance company bond. No other states with limited liability partnership statutes have a similar requirement nor are there
similar insurance requirements in the Uniform Partnership Act (1997) or the current limited liability partnership statutes of most jurisdictions. The BOC does not require any other type of business entity or professional entity (i.e., professional corporation, professional association or
professional limited liability company) to satisfy a similar insurance requirement. The insurance requirement under the BOC cause limited liability partnerships in Texas to suffer a disadvantage compared to limited liability partnerships formed in other states and other types of business entities formed in Texas. For the foregoing reasons, the Texas legislature repealed the insurance requirement imposed on LLPs and LLLPs by the BOC.

Before September 1, 2011, the BOC detailed the circumstances when a partner in a limited liability partnership is liable for an error, omission, negligence, incompetence, or malfeasance of another partner or representative of the partnership. Those provisions specified that a partner could be liable if the partner

  • was supervising or directing the responsible partner or representative or was directly involved in the specific activity in which the error, omission, negligence, incompetence or malfeasance was committed or
  • had notice or knowledge of such error, omission, negligence, incompetence or malfeasance by the responsible partner or representative and failed to take reasonable action to prevent or cure the error, omission, negligence, incompetence or malfeasance.

As a result, these Code provisions more closely conform to the approach taken in the Uniform Partnership Act (1997) and the trend in other jurisdictions. The legislature determined that the specified provisions are not found in the uniform law or the statutes of most other jurisdictions and are not considered necessary in view of the principle that a partner is usually liable for the partner’s own tortious conduct.

Impact of Law Changes

From a practical standpoint, these changes are significant. Let’s take the example of a “typical” limited partnership. That limited partnership will have a single general partner that is itself some type of limited liability entity, such as a limited liability company or a corporation. The general partner will have a small interest in the limited partnership (maybe even no interest after other recent changes to the BOC regarding “zero percent” general partners). That general partner will also probably have little or no assets other than whatever interest it may own in the limited partnership. But the general partner, by law, has unlimited liability for limited partnership liabilities that exceed the assets of the limited partnership. It is for this very reason that the entity to serve as a general partner was formed in order to protect the management and ownership of the general partner for the liabilities that the limited partnership might generate.

I am, therefore, advising my clients to form limited liability limited partnerships (LLLPs) instead of simply limited partnerships (LPs) in the circumstances that I would have before advised forming an LP. I also think that existing LPs should change into LLLPs. $200 per year in filing fees seems a small price to pay to get the added layer of protection for their general partner and to head off claims asserting the piercing of the liability veil of the general partner.

What to do

If you are interested in changing your LP into an LLLP, contact me and I will explain in more detail the process involved and its cost.
 

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Comments (1) Read through and enter the discussion with the form at the end
Brett Thompson Atty/CPA - February 15, 2015 11:15 AM

Do you know of a source for LLLP forms? I have plenty of forms, but I am trying to find one that addresses LLLPs.

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