In the next several weeks, This Week in Real Estate will examine Limited Liability Partnerships (LLP) and Limited Liability Companies (LLC).; they’re history and similarities and differences.

A limited liability partnership (LLP) is essentially a general partnership with the addition of limited liability for one or more partners. A general partnership is formed whenever two or more people do business together and does not require any legal filings. To create an LLP, typically, you must file additional paperwork with the state where the LLP is domiciled.

The LLP first appeared in Texas in 1991 with the purpose of shielding general partners of general partnerships (primarily law and accounting firms) from personal liability for negligence-based torts committed by other partners. Partners continued to be liable for the torts committed by those whom they supervised or directed, and the LLP was required to carry at least $100,000 in liability insurance to cover tortious acts. Not all professional firms, especially those doing business in multiple states, can legally operate in each such state as a professional corporation, limited liability company, or general business corporation.

By 1993, the LLP gained popularity with adoptions in various forms by Delaware, the District of Columbia, Louisiana, and North Carolina. Delaware had the broadest and most innovative LLP statute at this time. Delaware adopted several changes to the original Texas version, including the following:  greater protection from wrongful acts and omissions of other partners, imposing supervisory liability for only “direct” supervision, requiring minimum liability insurance of $1 million, granting express authorization for LLPs to engage in activities outside of the state, deferring to the state Supreme Court for a determination of law firm eligibility for limited liability status, and limiting the maximum registration fees to the amount corporations paid in franchise taxes.

In 1994, Minnesota and New York adopted “full shield” LLP statutes, which included enhanced limited liability parallel to corporations by protecting against vicarious liability for all partnership liabilities regardless of their nature. Delaware amended its LLP act in 1994 to protect partners from contract claims and specifying that partners are not liable for contributions to the partnership or indemnification to other partners due to liabilities of the partnership if the partner would not otherwise be liable under the LLP statute. A partner under the Delaware act was still liable for that partner’s own actions and for the actions of others that the partner supervised.

After 1994, the demand began for statutes that extended New York’s broad liability shield to all partnerships, not merely professional firms, without potential partner liability for receipt of distributions. The LLP was insolvent as under the Minnesota act. Georgia became the first jurisdiction to enact such a statute in 1995. Moreover, the American Bar Association (ABA) advocated such a provision in its Prototype LLC Act.

Almost all states now have full shield LLP statutes protecting against liability in both tort and contract claims, although professionals always personally remain responsible for their own individual malpractice.

Next week, we will examine the genesis of the LLC.