Governor Signs Limited Liability Partnership Act

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Governor Signs Limited Liability Partnership Act
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Just as everyone was beginning to fully appreciate the "ins and outs" of working with limited liability companies, the Legislature passed and Governor Whitman signed on May 1, 1995, a law which creates another legal entity known as the limited liability partnership. Many other states have adopted similar laws and New Jersey promoted the passage of this Act as pro­business legislation which would keep New Jersey abreast with other states which had enacted similar legislation.

What is a Limited Liability Partnership?

A limited liability partnership is simply a form of general partnership which, in certain situations, limits the liability of individual partners. Under the New Jersey general partnership statute, partners of a general partnership are jointly and severally liable for tort liabilities of the partnership and jointly liable for all partnership debts and other partnership obligations. Individual partner liability, by virtue of various agency law principals, may be imputed to a partner from actions of any of the other partners or agents or employees of the partnership.

The partners of a limited liability partnership will not be liable, either directly or indirectly, for debts, obligations and liabilities which are of the partnership whether in tort, contract or otherwise, which arise "from negligence, omissions, malpractice, wrongful acts or misconduct" committed while the partnership is a limited liability partnership and in the course of the partnership's business, by another partner or an employee, agent or representative of the limited liability partnership who is not under the direct control and supervision of the partner. Conversely, each partner of a limited liability partnership will continue to be liable for his or its own negligence, omissions, malpractice, wrongful acts or misconduct and those of any persons under the partner's direct supervision and control.

On its face, the Act would appear to be of great interest to professional firms such as law firms. However, law firms in New Jersey may not operate as limited liability partnerships unless and until the New Jersey Supreme Court concludes that such operation is a permissible means of practicing law. There is currently a study being undertaken to make recommendations on this issue. Accounting firms, however, are able to operate as limited liability partnerships and certain of the "big six" accounting firms have already done so on a national basis.

How to Form a Limited Liability Partnership

In order to become a limited liability partnership, a partnership must file with the New Jersey Secretary of State an application stating the name of the partnership, the address of the principal and registered office, the name of the registered agent for service of process, a brief statement of the business of the partnership and any other matters which the partnership determines to include and that the partnership applies for status as a limited liability partnership. A filing fee of $100 will be charged by the New Jersey Secretary of State. The application must be executed by a majority in interest of the partners or by one or more of the partners authorized to execute the application. The name of the partnership must contain at the end of the name the words "Limited Liability Partnership" or the abbreviations "L.L.P." or "LLP." On an annual basis, a limited liability partnership must file reports with the New Jersey Secretary of State and pay a $40.00 filing fee.

Issues for Lenders

The statute does not change the basic liability of a general partnership and its partners for debts and obligations of the partnership. As is currently the case when lenders deal with partnerships or limited partnerships, personal guaranties of the individual limited liability partners may still be appropriate and are not limited or prohibited by the limited liability partnership act. Further, just like general partnerships and limited partnerships, a limited liability partnership will typically be governed by an operating document (i.e., a partnership agreement), which should be referred to for questions of authority and other matters which may be relevant to a financing. If the limited liability partnership is created under the laws of another state, the new statute requires that the limited liability partnership qualify to transact business in New Jersey and a lender should insist that such qualification occur as a condition to lending.

It is likely that many existing general partnerships will elect to become limited liability partnerships. The process is easy and the cost is low. Conceptually, a general partnership making such an election does not become a new legal entity and, therefore, there should not be a need for the partnership to transfer assets to the new entity and the like. As a technical matter, such a conversion may breach various existing loan covenants of a borrower general partnership which might prohibit name changes or changes in the form of business operation. Further, the designation at the end of the general partnership's name as a "Limited Liability Partnership" or "LLP" might suggest the need for amendments to filed Uniform Commercial Code financing statements.

The Limited Liability Partnership Act becomes effective July 1, 1995.