Corporations and Partnerships: Their Legal Effects

boardroom.jpg Our firm is often asked by clients who are purchasing real estate or starting a business what type of legal entity, if any, they should form to protect their interests. In order to insulate an individual from personal liability, a corporate or partnership should be formed. In addition, within these categories, there are subcategories, such as limited liability companies (“LLC”) and limited liability partnerships (“LLP”). This post will discuss the basic qualities of such entities, as well as the legal effect that they have on their individual shareholders and partners.

According to New York State, a limited liability company (LLC) is an unincorporated business organization of one or more persons who have limited liability for the contractual obligations and other liabilities of the business. It combines corporation-style limited liability with partnership-style flexibility. The owners of an LLC are called “members” rather than shareholders or partners. A member may be an individual, a corporation, a partnership, another limited liability company, or any other legal entity. A managing member is to be designated when this type of entity is formed.

Forming an LLC will generally be more expensive than forming a New York corporation. This is because an LLC, upon formation, has a legal obligation to publish a statement of its formation in a publication ordered by the New York Department of State. The cost of such advertisement usually makes the cost of forming an LLC greater than the cost of forming a standard business corporation. An LLC has no restrictions on what it may own, so it can hold legal title to real estate or any other type of property. The members of an LLC are not personally liable for the debts and obligations of the LLC.

Another type of business entity considered by our clients is a limited liability partnership, or LLP. An LLP is similar to an LLC, except that the partners in an LLC must be licensed to practice a profession, such as law, dentistry, medicine, and certain other professions. Evidence of such licensing must be submitted to the Department of State at the time of formation of the LLP, showing that the proposed partners are licensed and in good standing in New York State. An LLP should have at least two partners. An LLP which is formed to perform a certain profession, such as law, dentistry, or medicine, is not permitted to conduct other types of businesses beyond the profession stated in its formation documents.

Although partners in an LLP are protected from personal liability for the LLP’s contractual obligations, they remain liable for their own negligence and misconduct, as well the negligence or misconduct of those under their direct supervision or control. For example, a doctor cannot insulate himself from personal liability for his own malpractice by being a partner in an LLP. However, the other partners in the LLP would not be personally liable for such malpractice. An LLP is therefore an entity in which partners who practice particular professions can form a entity which runs the “business” side of their profession, and be insulated from personal liability for the business debts of the entity. They would not be liable for any professional malpractice committed by the other partners, but would remain personally liable for their own potential malpractice.

Our firm has extensive experience in advising clients who wish to form their own legal entities as to which business entity best suits their needs, taking into account the particular business, potential tax considerations, management considerations and restrictions, transferability of interests, and the necessity to insulate themselves from potential personal liability. Please contact us if you are interested in forming such an entity for your business.