Investors in small businesses have long desired to combine limited liability for investors with flexibility in management structure and partnership taxation classification. The achievement of this goal is enhanced with the adoption of Limited Liability Company (LLC) and Limited Liability Partnership (LLP) statutes. All 50 states have passed LLC statutes1 and 48 states have passed LLP statutes.2 Missouri joined the trend when its LLC statute became effective in December of 1993,3 and its LLP statute took effect August 28, 1995.4 This article will compare the evolution of LLPs and LLCs, with the primary focus being on the scope of the liability shield afforded partners in a LLP.

By the end of the first year of availability in Missouri, 203 domestic partnerships registered as LLPs and there were 8,264 domestic LLCs (as of August 30, 1996).5 This number continues to rise, with more than 12,000 LLCs in Missouri in the spring of 1997. Earlier national figures foretold the popularity of LLCs, which swelled from 42,836 in 1994 to 87,799 in 1995. As states passed LLP statutes, that form of business grew from 26,000 in 1994 to more than 69,000 LLPs in 1995.6

LLCs preserve the limited liability feature for member-investors (typically a corporate characteristic), but permit greater flexibility in management structure than a corporation. Wyoming was the first U.S. state to adopt a LLC statute in 1977. It is only since the 1988 IRS ruling permitting partnership-like taxation of a Wyoming LLC7 that this new form of business organization has become popular in the United States. Most states (including Missouri) allow professionals as well as other types of businesses to form LLCs.8 LLP statutes developed rapidly in the 1990s in response to vicarious professional liability concerns of accountants and lawyers who practiced primarily in general partnerships.

While these two forms of business organizations share common goals, they start from differing premises. LLCs were invented as a new type of business entity with the limited liability for investors as a central characteristic; other structural features of LLCs were molded, in part, to satisfy the tax requirements for partnership-like taxation. LLPs, on the other hand, were developed as amendments to existing partnership law, thereby enjoying automatic tax status as a partnership, while retaining the other basic features of partnerships. For LLPs, the challenge was to develop exceptions to the principle of joint and several liability of partners9 which provided a greater liability shield for partners. Because they are statutory exceptions, LLP liability shields should be more strictly construed than the broader sweeping liability protection afforded LLC members or corporate shareholders.

For LLPs, significant issues remain concerning the degree of liability protection afforded by such statutes. The scope of that limited liability shield has varied considerably from state to state in LLP statutes adopted during the past five years. In all states, a partner continues to be personally liable for his or her own negligence or misconduct. LLP statutes potentially shield partners from personal liability in varying degrees for:

1. negligence, malpractice, malfeasance, errors and omissions of other partners (and employees not under the direct supervision of the shielded partner);

2. wrongdoing of other partners — whether based in tort or contract;

3. partnership debts and obligations — including commercial contracts and leases;

4. indirect liability or accountability — through contribution, indemnification, assessment; and

5. vicarious liability for the wrongful actions or negligence of those under direct supervision or control of partner.

Early LLP statutes were designed to shield non-negligent partners only from the "error, omissions, negligence, incompetence or malfeasance" of other partners.10 Texas was the first state, in 1991, to adopt a LLP statute,11 with the goal of protecting professional partners from the tort-based malpractice and negligence of their co-partners. This first generation statute even maintained vicarious liability for wrongful actions of other partners if the non-negligent partner had "notice or knowledge" of the misconduct and did nothing to try to prevent it,12 a concept dropped in later statutes. Partners continued to have joint and several liability for any debts or obligations derived from "other causes."13 Consequently, partners were still personally at risk on commercial debts, and even potentially on contract-based claims arising from the wrongdoing of another partner. These early generation LLP statutes did not contain language expressly protecting partners from indirect liability by way of contribution or indemnification, even in claims arising in tort.

Most LLP statutes passed after 1993 (second generation) expanded the liability shield to include (1) debts or obligations arising out of "wrongful acts or misconduct," and (2) protection both directly and indirectly, by way of indemnification, contribution and assessment. Vicarious supervisory liability of the non-negligent partner was limited to wrongful conduct of persons under the "direct supervision or control" of that partner. Second generation statutes, however, continued to link the liability protection to claims arising from the "omissions, negligence, wrongful acts, misconduct or malpractice, malfeasance" of other partners, employees, agents or representatives.14 While the exact list varied from state to state, the primary intent was still to shield partners from the acts of negligence and malpractice which were beyond their control.15 Second generation statutes were either ambiguous with respect to commercial obligations or they expressly retained the joint or joint and several liability of partners for all debts arising from "other causes."16 A few statutes even specifically provided that partners continued to have personal liability for "loans, leases, and other ordinary commercial debts."17 Half of the U.S. states have second generation statutes.18

Third generation statutes passed during the past two years attempted to provide a broad "comprehensive" liability shield for partners. They exempted partners from direct and indirect personal liability for all debts and obligations of the part-nership, by implication, including commercial contracts. These statutes provided a more general liability shield from personal liability on both tort and contract-based debts and obligations of the partnership, rather than linking the liability shield to negligence or wrongful acts of the partners. New York paved the way with the passage of a comprehensive liability shield in 1993,19 but only permitted certain professional partnerships to become LLPs.20

Missouri goes much further by allowing all partnerships, general and limited, to become LLPs. The very broad sweeping language21 of Missouri's statute, § 358.150.2, RSMo, is representative of liability shields in third generation statutes:

Although the language of the Massachusetts statute directly parallels that of Missouri,23 most other broad-based statutes also shield liability chargeable to another partner24 or created "by reason of being a partner or acting in the conduct of the business or activities of the partnership."25 Some broad-based statutes add language clarifying that a partner does not have personal liability solely by acting in the capacity of a partner, "rendering professional services or otherwise participating, as an employee, consultant, contractor . . . in the conduct of the business . . . ."26 Missouri, and most states, however, include language retaining personal liability for a partner's own negligence.27

The proposed 1995 ABA Prototype for the Registered Limited Liability Partnership Act (hereafter Prototype)28 provided a basic shield very similar to Missouri's language, with the additional qualification that liability was not to be based solely on the status of "being a partner."

The following model LLP language was adopted at the July 1996 meeting of the National Conference of Commissioners on Uniform State Laws (NCCUSL) to amend the 1994 version of the Uniform Partnership Act (RUPA).29 The basic LLP liability shield provided that:

Reenforcing comments emphasized the very broad liability shield for LLP partners. Noteworthy was the provision that the LLP liability shield overrides prior partnership agreement language to the contrary. This was significant, since the RUPA adopted joint and several liability for all obligations of the partnership, other than those subject to the LLP provision above or "otherwise agreed by the claimant or provided by law."32

Personal liability continues to exist for debts and obligations arising from a partner's own negligence or tortious conduct in all three current generations of state LLP statutes. Most statutes also provide that a partner has liability for the wrongdoing of those under the partner's "direct supervision and control." Missouri's liability provision is representative of the majority of statutes:

A few states restrict a partner's personal liability to claims based on that partner's own tortious conduct and do not include agency or supervisory-based vicarious liability.34 In South Carolina, for example, the partner is liable for the negligence and misconduct of others only if he is "at fault in appointing, supervising or cooperating with them."35

Neither the Prototype nor the NCCUSL Draft LLP Amendment contains specific language reenforcing a partner's personal liability for his or her own misconduct, but comments to each assume that result is intended. If a legislature wishes to add clarifying language, the Prototype's Comment to § 306 suggests a statement indicating that "Nothing in subsection (c) shall affect the liability of a partner in a registered limited liability partnership for his own negligence, malpractice, wrongful acts or misconduct." Neither model act addresses retention of vicarious liability for the actions of individuals under the direct supervision or control of a partner. The model acts could be classified as fourth generation statutes, since they further broaden the liability shield by removing vicarious (or supervisory) liability.

This author recommends that supervisory liability be retained, consistent with Missouri's present LLP statute. Especially in professional service LLPs, such as law firms, the responsibility for many tasks is traditionally nondelegable. Were it otherwise, paralegals and secretaries could be engaging in the "unauthorized practice of law."36 Retention of supervisory or vicarious liability for misconduct committed by employees under the direct supervision and control of the partner also provides a fairer balance between the desire of a partner to be insulated from the liability generated by others versus the traditional rights of partnership creditors to look to partners personally.

Because of the wide variation in scope of LLP liability shields, choice of law and conflicts of law issues become important. While the Revised Uniform Limited Partnership Act (RULPA) provides that the law of the state in which the partnership is organized should govern internal relationships within the partnership and liability issues,37 the UPA and RUPA do not address these conflicts of law issues for general partnerships. Most recent LLP statutes, including Missouri's, provide that both the internal affairs of the LLP and "debts, obligations, and liabilities of or chargeable to the partnership" shall be governed by the laws of the state in which the LLP was formed or registered. Where a partnership is initially registered in Missouri as a LLP, Missouri law should govern.38 The scope of liability protection of partners in a foreign LLP (which is doing business in Missouri) is determined by the state in which the LLP initially gained LLP status.39 The legal existence of a LLP formed under statutes in Missouri should be honored under comity principles and the full faith and credit provisions of the U.S. Constitution,40 unless such recognition violates the strong public policy of another state. As a matter of ublic policy, however, some states may be unwilling to grant partners of foreign LLPs a wider liability shield than is afforded partners in their domestic LLPs.

To qualify for the limited liability shield, partnerships must register as limited liability partnerships with the Secretary of State.41 Such a partnership must also add to the end of its partnership name: LLP, L.L.P. or "Registered Limited Liability Partnership,"42 thereby alerting third parties of its LLP status. No other notice to creditors (that the partnership has become a LLP) is required by statute in Missouri,43 although some states require publication of LLP status in newspapers.44 This registration must be accompanied by filing fees,45 but Missouri does not require additional special insurance or special trust funds when a partnership becomes a LLP.46 Missouri is among the few states permitting both general and limited partnerships to register as LLPs.47

For partners to continue to qualify for the liability shield, a Registered Limited Liability Partnership must file a renewal application annually with the Secretary of State.48 This registration is accompanied by an annual renewal fee and updated information.49 In contrast, once a business files with the Secretary of State to become a LLC, it forms a new business entity and does not have to refile annually to keep that entity status. For the partnership, however, the election to be treated as a LLP type of partnership is an annual election.

At present, Missouri's statute has no "saving clause" if a partnership fails to re-register each year; LLP status expires one year after the date of registration.50 If such renewal filing is not made, the business will be treated as a traditional general partnership by default,51 thereby once again subjecting partners to joint and several liability for all debts and obligations of the partnership and for everything chargeable to the partnership under §§ 358.130 and 358.140, RSMo. While the initial filing or subsequent failure to refile annually as a LLP does not dissolve the partnership,52 the latter may put the partners at risk of traditional personal liability.

The NCCUSL Draft LLP Amendments and a few current LLP statutes contain "saving clauses" to protect partners from an inadvertent lapse of LLP status. Such provisions require the Secretary of State to provide written notice to the partnership that it has failed to pay fees or file report(s). The notice also warns the partnership that its LLP partnership status will be "revoked" after a specified period of time53 (unless the filing, fees and penalty are forthcoming within that time period). This helps prevent the inadvertent lapse in LLP status which is now theoretically possible in Missouri. A NCCUSL partnership is given a two-year grace period in which it can reactivate its LLP status (by filing and paying appropriate fees), whereupon the liability shield will relate back and provide the LLP liability shield throughout the lapsed period. Under the Prototype model, such LLP status is restored and the partnership is "deemed not to have lost its status as a registered limited liability partnership."54 Under such a statute, only active revocation of LLP status by the Secretary of State or cancellation of LLP status by vote of the partners would remove the LLP liability shield.

Even if a partnership continues to operate beyond its specified term or conducts business after dissolution,55 LLP status is retained without the need for a separate filing under the NCCUSL draft. It becomes an at-will LLP partnership with the same protection as if it had been an at-will initially.56 LLP status is to remain in effect "regardless of changes in the partnership" until that status is revoked or cancelled.57

The LLP filing does not create a new type of entity, just a prospective liability shield for partner-investors. If a partnership was a general partnership before filing as a LLP, it is still a general partnership aftersuch filing and is subject to the default provisions and requirements of general partnership law. Since the liability shield for partners is NOT retroactive, general partners continue to have joint and several liability on debts and obligations that arose prior to the effective date of LLP status.58

Determination of the meaning of "retroactive" in the context of LLP liability shields needs to be clarified. The courts will be tempted to revisit issues related to when a debt or obligation was "incurred, created or assumed" — at the making of a contract or the breaching of it, at the commission of a tort or the discovery of the injury.

Missouri's LLP statute does not specify whether it is the date that the tortious conduct occurs or the date that the tort claim accrues that is more relevant for purposes of the application of the prospective LLP liability shield. In Missouri, a cause of action for fraud accrues when the plaintiff discovers the fraud or should have discovered the fraud through the use of due diligence. At that point the five-year statute of limitations begins to run. Even if the fraud is not discovered within 10 years of the fraudulent concealment, the statute of limitations will begin to run 10 years after the fraud occurs.59

Comments to NCCUSL Draft LLP Amendment § 306 posture that partnership tort obligations are incurred "when the tortious conduct occurs," thereby preventing a culpable partnership from quickly filing to become a LLP in an effort to defraud (pre-existing) creditors. The NCCUSL draft, consistent with the Rawls' neutrality-based approach to ethics, should be adopted in Missouri. Under that ethical approach, an objective neutral observer (without knowledge of the identity of the plaintiff or tortfeasor) would deem it fairer to hold the tortfeasor liable for misconduct which occurred before filing the LLP status. A tortfeasor ought not be able to escape personal liability through fraudulent concealment of a tort or fraud-in-the-inducement of a contract where the act of fraud occurred prior to registration as a LLP.

NCCUSL and the Minnesota LLP statute provide that debts and obligations "accrue when the note, contract or other agreement is entered into" and that "amendment, modification, extension or renewal . . . does not affect the time at which the partnership debt or obligation" arose. Missouri has no parallel statutory language.61 Should installment contracts and multi-year lease agreements be viewed as single obligations or as divisible ones? Partners in LLPs may argue that performance due after the filing of LLP status should be shielded in installment contracts and leases with periodic payments.62 They also may argue that, if the breach of contract occurred only after the partnership filed as a LLP, the liability shield was in effect. Conversely, the creditors will argue that when they entered into a contract with the general partnership they relied on the stated or implied understanding that partners would have joint and several liability on the performance of the contractual obligations. They never consented to a contract which lacked that recourse. The creditors' argument will probably be the stronger one. Any change in partnership liability imposed by state statute which affects existing contracts needs to be prospective to withstand constitutional arguments.

The question of whether a partnership should be treated as a separate entity or merely as an aggregate of its members was debated when the National Conference of Commissioners on Uniform State Laws first considered the creation of a Uniform Partnership Act (UPA). Ironically, entity status was initially proposed in 1902 to make partnership law more consistent with law merchant. The majority of UPA drafters in 1914, however, favored a hybrid aggregate theory because they wanted to continue to hold general partners personally liable for debts of the business.

Under this aggregate theory, a partnership is not an entity separate from its members; the partnership is merely an outward extension of the coperative form of doing business.63 Consequently, general partners under the old UPA are jointly and severally liable for torts, wrongdoings and breach of trust of partners, but jointly liable for other debts and obligations, such as contracts and notes.64 While a partnership can sue in its own name, individual partners have to be joined before a creditor can collect against partnership assets. General partners remain personally liable on business debts and vicariously liable on torts committed in the scope of partnership activities.

Until the passage of the LLP statutes, little attempt was made to separate the liability of the partnership from the joint and several liability of the partners for "everything chargeable to the partnership." While the common law concept of "marshalling of assets" required creditors to exhaust remedies against the partnership before proceeding against partners individually,65 partners were ultimately still responsible for partnership debts and obligations. LLP language and intent does not mesh well with UPA-type partnership statutes because of "aggregate theory" upon which the traditional UPA model is based. The release of the partners from this ultimate responsibility in a LLP results in a conceptual incongruity if the partnership is not an entity separate from its partners. Therefore, serious consideration should be given to the adoption of the RUPA,66 since separation of the liability of partners from the liability of the partnership is more consistent with the RUPA's entity status for the general partnership.67

As protection for creditors, some states (not Missouri) require the LLP to obtain additional insurance or to establish a designated trust fund in exchange for the liability shield afforded LLP partners. In states with special LLP insurance requirements, the mandatory minimum varies from $100,000 to $7.5 million.68 Since the creditors will no longer have recourse against individual partners if the LLP assets are insufficient, adequate insurance becomes even more important to the satisfaction of the creditors' claims against the LLP itself.

Under Missouri's LLP statute, individual partners are no longer appropriate parties in suits against a LLP to "recover damages or enforce obligations arising out of acts, omissions, malpractice or misconduct of the type described in" Missouri's LLP liability shield.69 Statutory language is incomplete in providing the intended shield, however. While the liability shield of subsection 2 of § 358.150, RSMo, suggests that the LLP partner does not have personal liability on contracts, subsection 4 does not expressly exempt the partner from being a party to a proceeding arising from contract disputes. Furthermore, a partner continues to be a proper party to sue when charged with his or her own misconduct or the misconduct of someone under his direct supervision and control under § 358.150.3, RSMo.

If partnership assets are insufficient to cover both pre-LLP debts and post-LLP debts, which debts have priority? The answer to this question has significant implications, since the LLP liability shield is not retroactive. If partnership assets are used to pay the pre-existing debt, the new creditor's main remedy will be against the negligent LLP partner for the balance owed on the tort claim.70 Conversely, if LLP assets are used to pay the new debt in full and partnership assets are inadequate to discharge the old debt, partners still have joint and several liability on pre-existing debts and obligations, and contribution may be required. In some circumstances, however, such a contribution could be viewed as an impermissible indirect contribution to the new LLP debt under § 358.150.2, RSMo.

Provisions in partnership agreements related to indemnification and contribution should be carefully reexamined when the decision is made to become a LLP. Rights and duties of partners related to contribution and indemnification can be altered by agreement according to § 358.180, RSMo. Section 358.150.2, RSMo (the LLP iability shield), does not specifically negate that possibility, nor does it require a knowing written consent by an individual partner to reinstate personal liability.71 To the extent that the partnership agreement requires contribution or reenforces the joint and several liability, the effectiveness of the LLP liability shield could be lost if such provisions remain in the partnership agreement, especially if the pre-existing partnership agreement is construed to override the LLP statutory protection.

The NCCUSL Draft LLP Amendment in § 306(c), on the other hand, provides that "anything inconsistent in the partnership agreement that existed immediately before the vote required to become a limited liability partnership" shall be superseded by the statutory LLP liability shield. NCCUSL comments indicate that waivers of LLP liability protections are to be intentional and through actions taken after LLP registration. Missouri has no similar statutory language. In a few states, such as Idaho, waiver of the liability shield must be "expressly agreed [to] in writing" by the partner,72 and usually would take the form of a guarantee or surety agreement. In other states, the liability protection can be waived in particular contracts upon a majority vote of the partners.73

Certainly if any provision requiring contribution were added to the partnership agreement after a partnership filed as a LLP, such provision would work to undermine the scope of the LLP liability shield. Even internal partnership agreements designed to partially reinstate the duty of contribution in a LLP may place the partners at risk. In a recent Missouri case in which a limited partnership agreement required additional contributions by limited partners, the Missouri Court of Appeals for the Western District held that the RULPA partnership had a common law right to enforce the duty of contribution.74 Under § 807(f) of the NCCUSL Draft LLP Amendments, an assignee for the benefit of creditors or partners may enforce the duty of contribution where such duty exists.

Partners have a right to be indemnified for "payments made and personal liabilities reasonably incurred by the partner in the ordinary and proper conduct of business . . . ."75 This right of indemnification is unaltered in the general partnership statutory provisions to which all LLPs are also subject. Unless the partnership agreement modifies it, the right of indemnification still exists, despite the LLP liability shield language stating that partners shall not be liable indirectly "by way of indemnification, contribution [or] assessment."76

The right of indemnification and the protection against contribution may affect the ability of a LLP to meet its outside debts as they come due. Where an employee under the supervision of a partner is negligent and the partner pays a claim based on that negligence under § 358.150.3, RSMo, the partner should have a right to indemnification, especially since the vicarious liability was incurred in the ordinary course of business without proof of improper conduct by the partner. When a partner's own negligence occurred in the ordinary course of business, however, is such a partner still entitled to indemnification under § 358.180.2, RSMo, or should such negligence be construed as improper conduct? If LLP assets are not sufficient to meet all outside debts as they come due, would such indemnification operate as a fraud on creditors, especially if the other partners are not required to contribute to such partnership debt under § 358.170, RSMo?

Are there implied limitations (for the benefit of creditors) to be imposed on distributions to partners, even if the partnership agreement does not impose such limitations? According to the Comment to § 807 of the NCCUSL Draft LLP Amendments, "a partner's contribution obligation in dissolution . . . only considers the partner's share of unshielded obligations regardless of the payment order by the partnership." Limited partnership law (RULPA) addresses liability for contributions, distributions, withdrawals and liability upon return of capital,77 but no parallel explanation exists under current LLP law.78

In the bsence of bankruptcy, non-negligent partners should have no personal liability and no duty of contribution for the tort claim that arose during LLP status. If bankruptcy results, the prioritization becomes even more complex. Shall the payment of one obligation from LLP funds be treated as an impermissible preference if it occurs shortly before the filing for bankruptcy? Can the bankruptcy trustee challenge such prioritization even though 1994 amendments to Section 723(a) of the Bankruptcy Code indicate that the partners ought not be liable for more than they would in non-bankruptcy situations?79

Neither the formation of a LLP or a LLC can guarantee an owner/member or partner freedom from piercing of the entity veil arguments. Even in a traditional corporation, the corporate veil may be pierced to hold shareholder-investors personally liable for business debts where the shareholder has (a) failed to honor the separateness of the corporate entity (by commingled personal and corporate assets), or (b) failed to honor corporate/business formalities, or (c) used the business as a conduit to defraud creditors. The latter condition is operative, for example, when controlling shareholders design a corporation to unnecessarily operate at a loss.80

Similarly, LLP partnerships should be subject to piercing the veil arguments under "conditions and circumstances under which the corporate veil" might be pierced.81 Although some state statutes include a savings clause which specifies that informal management of a LLP is not a ground for piercing the corporate veil,82 failure to file annual renewal applications or follow other statutory requirements may give rise to veil piercing arguments. Where partners control the business and its assets in such a manner as to defraud creditors or to intentionally prevent sufficient liquidity to meet debts as they come due, even a LLP partnership should be subject to a piercing the entity veil argument. The liability shield should not protect partners from such wrongdoing. Partners will also have to be more careful in seeing that partnership assets are used only for partnership (not personal) purposes to minimize piercing the entity veil arguments based on commingling of assets.

Creditors, who lack actual knowledge of LLP status and who relied on the assumption that general partners would be personally liable because of past dealings with the partnership, may make estoppel arguments. Such arguments will be advanced even though Missouri does not mandate direct notification of creditors and suppliers of the change to LLP status. Constructive notice is provided through the LLP filing with the Secretary of State.

Estoppel arguments may exist in cases involving liens on, or equitable interests in, real estate. Partnerships are not required to file LLP status locally in the county in which they own real estate or transact business, nor is there any requirement that they amend any previous filing to indicate the new LLP status. Lien creditors or mortgagees may advance the argument that they relied on the assumption that such general partners would be personally liable for the deficit if the secured property was insufficient to secure the entire debt. Arguably, creditors are not misled by the failure to re-title real estate, however, any more than they historically have been when partnership property has been held in the name of one or more partners instead of in the name of the partnership itself. Preexisting liens on real estate should be protected, assuming the non-retroactivity clause relates back to the time the lien was filed (rather than the date the debt is due). For additional protection, creditors may seek written guarantor or surety arrangements as a matter of course when dealing with partnerships in the future, so they can continue to hold a partner personally liable on contracts, whether or not the partnership is a LLP.

Under the partnership by esoppel theory, an alleged partner who misrepresents himself as a partner may have joint liability with any other persons consenting to such representation.83 When his or her actions result in liability of the partnership, the alleged partner "is liable as though he were an actual member of the partnership."84 Since the alleged partner's name does not appear in the LLP filing, does this mean that the liability for an alleged partner is actually greater than that of an actual partner (even though the alleged partner was acting with the knowledge or consent of a real partner)?

Limited partners have always been vulnerable to estoppel arguments, even though they enter a RULPA partnership under the statutory premise of limited liability.85 A limited partner risks the loss of its liability shield where (a) the limited partner exercises control substantially similar to that of a general partner, and (b) a creditor knows of and relies on that exercise of control to assume that the partner is acting as a general partner.86 Although the "safe harbor provisions" allow for some participation in partnership decisions,87 limited partners have had to give up substantial voice in management (and some tax advantages) to obtain protection from liability beyond capital investment. Consequently, traditional limited partners may now be more vulnerable to personal liability than LLP general partners.

Since Missouri (and a few other states) allow a limited partnership to qualify for LLP status, such a filing would provide a fuller liability shield for limited partners as well as general partners. To date few limited partnerships (LPs) have elected this option.88 With the LLP option now widely available, it is less likely that a start-up business will choose to become a limited partnership, unless its founders desire to have some "silent" investors with diminished voting power or a limited partnership is being used for family estate planning purposes.

LLP managing partners and LLC managers will also be vulnerable to personal liability as "owners" or "operators" under environmental laws such as CERCLA (Comprehensive Environmental Response, Compensation and Liability Act).89 Even if state statutory language existed that attempted to shield them from such liability, the attempt would probably fail. The corporate veil has been successfully pierced to hold officers and directors who actively participate in management decisions liable for environmental clean-up.90

In a LLC, members (owners) and managers of limited liability companies in Missouri are protected from personal liability by the following statutory language:

While virtually no business entity can totally shield an individual from liability for his or her own wrongdoing, LLC members start with the principle that they are shielded from personal liability on LLC debts as long as they stay within their authority. Only where persons allegedly act on behalf of the LLC, but "without authority to do so and without a good faith belief that they have such authority," are they "jointly and severally liable for all [resulting] debts and obligatins."92 The LLC liability shield will not protect against an internal suit where managers or members do not act in accord with provisions of the LLC statute or the LLC operating agreement.93

In contrast, traditional general partners are jointly and severally liable even when they act properly and within their authority. Even LLP partners who act within their authority, but in a negligent manner, can have personal liability for their own misconduct. While a LLP partner also continues to have vicarious liability for the wrongdoing of those under the direct supervision and control of the partner,94 the LLC statute does not expressly hold a member vicariously liable for the actions of those he supervises.

Missouri's LLP liability shield attempts to exclude the partner from joint and several liability for all debts and obligations "chargeable to the partnership," but (unlike the LLC language) there is no specific statutory reference to obligations resulting from a court decree or from acts of partners, agents or employees. Should the inclusion of the language in the LLC statute and its omission in the LLP statute be read as intentional or inadvertent? Considering the haste with which the substitute LLP language was added to HB 588 in 1995, the difference is probably inadvertent.95 If partners in LLPs are intended to have the same basic liability protection as member-owners in LLCs, however, the statutes should be amended to contain the same liability shield language.

If LLC assets are not sufficient to pay debts as they come due or total liabilities exceed total assets, LLC members may be liable for the return of any distribution. Liability of a LLC member will not exceed the amount of the distribution, and the extent of liability may differ based on the LLC member's pro rata share. Persons with authority to make the distributions may also have personal liability to the extent that the distribution was "necessary to discharge the limited liability company's liabilities."96 Where liabilities exceed assets, however, a LLC member is not obligated to make additional contributions unless the member agreed to do so in writing97 or such contributions are required in the written operating agreement. A similar requirement of written assent should be added to Missouri's LLP laws.

For U.S. income taxation purposes, domestic LLCs may be taxed either like a corporation or similar to a partnership (with pass-through taxation of profits and losses). Although the corporate-like limited liability is an appealing quality for investors in a LLC, the ability of the LLC to qualify for partnership-like taxation is an equally compelling factor for many businesses.

The desired tax status is enhanced by the finalization of the IRS "check-the-box-rule," effective January 1, 1997.98 Under this new rule, most unincorporated domestic associations will be presumed to be classified as partnerships for federal income tax purposes — unless they elect otherwise.99 The classification a business claimed on May 8, 1996, will be grandfathered-in as long as there is a "reasonable basis" for that status.100 This default rule applies to domestic LLCs with two or more owners. A one-member LLC is not a partnership,101 but it may elect to have the entity "disregarded" for tax purposes, allowing pass-through taxation.102 Both domestic LLPs and LLCs will qualify for partnership tax treatment, even though all of the member-investors have limited liability.103

For foreign businesses, however, limited liability of all investors will be the decisive characteristic that continues to trigger corporate tax treatment. Unless at least one investor in a foreign business retains unlimited liability, qualifying for partnership tax treatment will be difficult. If investors retain unlimited liability on business debts, the default will also be partnership-like taxation.104 Although LLCs have long been an alternative form of business in many European, South American and African countries, many of these foreign equivalents are considered corporations for taxation purposes. IRS regulations classify some types of foreign and dometic businesses as corporations and otherwise preclude listed businesses from being taxed as partnerships105 (ex: banks, insurance companies, taxable mortgage pools, wholly owned state organizations and publicly traded partnerships).106

Most other noncorporate associations can file an election if they do not want to be classified according to the default classification. Once the election has been made, the business cannot change classifications for 60 months (similar to the current S corporation election restriction).107 A partnership which transfers 50 percent or more of its total interest in capital and profits, however, is deemed to have terminated (triggering liquidation of the existing partnership). The newly formed business is free to elect its preferred classification status.

Before finalization of the "check-the-box rule," LLCs which wished to acquire partnership-like taxation status had to be carefully structured under the Morrisey test. To qualify for partnership-like taxation, the LLC could not include more than two of the following key corporate characteristics of the Morrisey standard:

1. Limited liability for members (owners);

2. Continuity of life (perpetual duration);

3. Free transferability of member's interest;

4. Centralization of management.108

Tax tests based on traditional corporate versus traditional partnership characteristics made more sense in an earlier era, but now that state business organization laws permit closed corporations to adopt partnership-like management and general partnerships to offer limited liability to their partners, these traditional distinctions are less compelling. Recognizing this trend, the IRS replaced the above traditional criteria with the "check-the-box rule."

The IRS' interpretation of the Morrisey limitations had been successively liberalized since 1988, when the IRS first allowed appropriately structured LLCs to qualify for partnership tax treatment.109 Rev. Proc. 95-10 permitted more decision-making authority in elected LLC managers without forfeiting a partnership-like characteristic. Delegation of management authority to a member with at least 20 percent ownership interest had been permitted.110 In some instances a full membership vote to continue the business was necessary only when a manager-member died, resigned or otherwise triggered dissociation. Approval by the majority-in-interest of members was sufficient to permit continuation of the business after a dissolving event,111 negating the necessity for unanimous vote which had been required in the original "bullet proof" LLC statutes.112 Similarly, a simple majority for transfer of an ownership interest in the LLC became acceptable.113

Although LLCs no longer have to satisfy even these interpretations of the Morrisey test for income tax purposes, the structure of the LLC still has other functional and legal significance. Each LLC needs to consider whether or not a manager-managed structure or active involvement of all investors in day-to-day decisions is more appropriate for that particular business. The concern may now shift from partnership versus corporate characteristics to general partner versus limited partner characteristics. If the LLC is not "manager-managed," rules related to net income from self-employment may cause the active members to incur self-employment tax as general partners under new proposed IRS regulations.114 The functional structure also affects whether or not the investor-members are considered "employees" for purposes of complying with civil rights legislation (which applies to businesses with 15 or more employees).115 The operating agreement of the LLC needs to address employment-related issues ranging from division of decision-making authority and management selection to job responsibilities to vacation, sick leave and disabilities.

Dissociation of members no longer triggers dissolution automatically (unless the LLC articles so provide), but does trigger other considerations. The LLC should reevaluate what circumstance will cause the business to dissolve and whether or not those events can be overridden by a majority vote. A LLC is now free to set its ow rules concerning dissolution and continuation of the business within the parameters of (amended) state laws. Restrictions on transferability of interest116 in small family or closely held businesses still are important functional decisions to continuation of the business. Such LLCs should still restrict the transferral of the right to participate in management. The rights of dissociated members and the estate tax consequences are not resolved by the "check-the-box rule," nor are certain accounting basis117 and bankruptcy implications.118

New businesses should seriously consider the advantages offered by LLCs and LLPs. Fewer start-up businesses will strive to satisfy the more cumbersome restrictions of S corporation status, especially if more of the losses can be passed through to LLC members and disbursement of appreciated property can be passed on to its members on a stepped-up basis.119 Conversion from a corporation to a LLC or LLP, however, would be an entity dissolving event which could trigger capital gains taxes upon liquidation, making the entity selection process more complicated for existing businesses.

Since the structure of most domestic LLCs was income tax-driven, the "check-the-box rule" may reduce transaction costs for new LLCs and will allow LLCs greater flexibility in the structure of the management, continuity and transferability of interest. Missouri's LLC statute and the Uniform Limited Liability Company Act (ULLCA) are both flexible models which do not mandate particular limitations on any of the above features, but some statutory adjustments may be needed in light of the above concerns.

Recommendations for Changes in Missouri Statutes

1. ANNUAL RENEWAL "SAVINGS CLAUSE": Add a "savings clause" to cover inadvertent failure to file annual renewal forms. Require renewal reminder notices to be sent out by the Secretary of State's office. Include language preserving limited liability "with respect to negligent or wrongful acts or misconduct or other debts or obligations which occurred or arose while LLP registration was in effect." Furthermore, include a clause allowing for a grace period during which the partnership may file for renewal of LLP status without loss of the liability shield.

2. PROSPECTIVE APPLICATION CLARIFICATION: Clarify that general partners remain jointly and severally liable for tortious conduct occurring prior to filing as a LLP (regardless of when the cause of action accrues for purposes of the statute of limitations). Specify that debts and obligations accrue when a note, contract or agreement is entered into and that subsequent performance of such agreement shall not alter either the date at which the obligation arose or the liability of the partners — unless otherwise agreed in writing by the parties.

3. LIABILITY SHIELD PREEMPTION OF PREEXISTING PARTNERSHIP CLAUSES: Provide that the statutory LLP liability shield can only be modified by subsequent changes to the partnership agreement or by written, informed consent of the non-negligent partner to be charged with liability. Clarify that the LLP shield is to override language to the contrary in the pre-LLP partnership agreement.

4. CONTRIBUTION: Address more fully the issue of if or when a partner is "chargeable with a share of the losses,"120 when contribution may be required (both in an ongoing and dissolving partnership), as well as the extent to which indemnification is still permitted. The present LLP liability shield and the language in general partnership law regarding these two areas needs clarification.

5. PIERCING THE VEIL: Provide that basic grounds for holding shareholders personally liable under a piercing of the corporate veil shall apply to LLPs to hold partners personally liable. Although use of the LLP as an alter ego or a conduit to defraud creditors can give rise to personal liability, informal management of the LLP shall not be grounds for piercing the LLP veil.

6. RECONCILE LLC AND LLP LIABILITY SHIELD: LLC and LLP language should contain the same words to provide for a more consistent liability shield for investors. Define words such as "debt" "occurrence" and clarify when they accrue, are "created" or "incurred" for purposes of a determination of prospective versus retroactive debts or obligations in LLPs and LLCs.

7. LLP LIABILITY SHIELD: The following language is recommended for § 358.150, RSMo, as the basic liability shield for LLP partners.

8. ENTITY THEORY AND RUPA: Adopt RUPA's entity theory as more logically consistent with the LLP liability shield. Examine the NCCUSL model LLP liability shield language, but retain Missouri sections which add more detailed clarity, especially § 358.150(3), RSMo, providing for a partner's personal liability for his or her own torts and those of individuals under the "direct supervision and control" of the partner.

As of the spring of 1996, 10 states have revised general partnership statutes along the lines of one of the RUPA drafts.121 Under the RUPA, the adoption of entity status has additional implications122 concerning the nature of ownership of property123 and the effect of dissociation of partners124 which are beyond the scope of this article. The addition of the LLP language to the RUPA enhances the probability that additional states will consider changes to existing general partnership law. A RUPA-type statute is now under review by a subcommittee of The Missouri Bar's Business Law Committee125 and may be introduced in a future Missouri legislative session.

Limited liability for investors is now available in LLCs and LLPs, in addition to various types of corporations. By 1996 all U.S. states had LLC statutes. Within the past five years all but two states have adopted Limited Liability Partnership (LLP) statutes to afford general partners limited personal liability, although the degree of liability protection varies from state to state. Early LLP statutes were aimed primarily at protecting professional investors against the malpractice Torts of their co-partners. Some states have expanded that protection to include a shield against personal liability for the contract-based wrongdoing of co-partners. The ABA-NCCUSL model LLP statutes and Missouri's statute go further in protecting partners from personal liability for all debts and obligations chargeable to the partnership. All states still hold a partner liable for his or her own torts and misconduct and most retain vicarious liability for the wrongdoing of individuals under the direct supervision and control of the partner.

Limited liability partnership registration significantly reduces the circumstances under which a partner will incur personal liability beyond capital investment, as long as LLPs renew their registration each year. When coupled with proposed changes in federal tax law, LLPs and LLCs are now the preferred type of business organizations for most small start-up businesses. Since the scope of liability protection varies from state to state, however, relevant state statutes should be examined before a partnership registers as a LLP or transacts business in a particular state.

1 Vermont and Hawaii became the last two states to enact LLC statutes in 1996. Wyoming had been the first state in 1977, followed by Florida in 1982.

2 Type I in Texas, Louisiana, Delaware, District of Columbia, North Carolina and Arizona.

Type II in Arkansas, Connecticut, Illinois, Iowa, Kansas, Kentucky, Michigan, Minnesota, Pennsylvania, South Carolina, Florida, Utah, Mississippi, Nevada, New Jersey, New Mexico, Oklahoma, Tennessee, Vermont, Virginia, Washington and Wisconsin.

Type III in New York, Ohio, California, Colorado, Georgia, Hawaii, Idaho, Indiana, Maryland, Massachusetts, Missouri, Montana, North Dakota, Oregon and South Dakota.

Wyoming has not enacted an LLP statute and no such statute is pending.

3 Sections 359.700, et seq., RSMo 1996.

4 HB 558 (1995), Mo. Rev. Stat. § 358.150 (1996).

5 Statistics were provided by the Secretary of State's office through Aug. 30, 1996. In addition to domestic filings, 534 foreign LLCs registered to do business in Missouri and 15 foreign LLPs registered. Missouri also had 5,408 domestic and 1,439 foreign limited partnerships.

6 Statistics at Partnerships Revisited, ALI-ABA Satellite Seminar (June 18, 1996).

7 IRS Rev. Rul. 88-76 (1988).

8 A LLC form of business organization may not be available to all professions in California, Delaware, Illinois, Indiana, Kentucky, Massachusetts, Nebraska, Nevada, New Jersey, New Mexico, Rhode Island, West Virginia and Wisconsin. Sheldon Banoff and Robert Keatinge, Forms of Limited Liability Organization for Lawyers Chart (3/25/96) in Partnerships Revisited, ALI-ABA Satellite Seminar (June 18, 1996). Vermont and Hawaii just passed LLC statutes in 1996.

9 In Missouri all general partners "are liable jointly and severally for everything chargeable to the partnership . . . and for all other debts and obligations of the partnership." (§ 358.150.1, RSMo 1996.) Similarly the RUPA applies joint and several liability to "all obligations of the partnership unless otherwise agreed by the claimants or provided by law." (RUPA § 306(a)) Many states (following the older UPA § 15), however, have joint and several liability for "everything chargeable to the partnership under" certain sections of the statute (generally tort claims for wrongful acts and breach of trust with respect to receipt of property) and joint liability fr "all other debts and obligations of the partnership" (generally contracts and notes).

10 Tex. Art. 6132b-3.08(2) (1993); N.C. Gen. Stat. § 59-45(b)(1993); D.C. Code § 41-146(a) (1993).

11 Tex. Rev. Civ. Stat. Ann. art. 6132b, § 15 (West 1995).

12 Tex. Rev. Civ. Stat. Ann. art. 6132b-3.08(1)(B) (West 1993). The 1993 revision to the original Texas statute added a liability shield for those partners who tried to prevent or cure the negligence of others; under the original statute "notice or knowledge" was sufficient for personal liability. The District of Columbia statute, modeled after the original Texas statute, maintains liability where the partner had written notice or knowledge of the errors. D.C. Code Ann. 41 § 146(a)(2) (1996).

13 Tex. Rev. Civ. Stat. Ann. art. 6132b-3.08(20(A) (West 1993); N.C. Gen. Stat. § 59-45(c)(1)(1995).

14 See for example, Rev. Stat. Ann. titl. 31 § 295-A(2); Miss. Code Ann. § 79-12-29 (1996), Neb. Rev. Stat. § 67-315 (1996), Nev. Rev. Stat. Ann. § 87.150 (Michie 1996); 1995 Okla. Sess. Laws HB 2893; N.H. Rev. Stat. Ann. Supp. § 304-A:15 (1996); Wash. Rev. Stat. Ann § 25.04 (West 1996); W. Va. Code § 47B-3-6 (1996).

15 While the list of tort-based wrongdoing is more descriptive than a generation three-type LLP statute, it is also more readily subject to the maxim that things not in the list are intentionally excluded.

16 805 Ill. Comp. Stat. Ann. 205-15 (West 1996) (joint liability); N.C. Gen. Stat. § 59-45(c) (1996) (joint and several liability).

17 Alaska Stat. § 32.05.100.2(c)(3) (Michie 1996).

18 See note two.

19 The New York statute (N.Y. Partnership Law § 26(b) (McKinney 1997)) is often cited as a model for the Missouri statute, but there are a number of significant differences between the two statutes. New York only allows certain professional partnerships to become LLPs and then only after publication of notices, in addition to central filing. Missouri does not restrict the nature of partnership which can qualify as a LLP and does not require an additional notice. New York statute adds additional language shielding partners from debts and obligations chargeable to partners ("each other"), in addition to those chargeable to the partnership (both statutes) "by reason of being such a partner or acting (or omitting to act) in such capacity or rendering professional services or otherwise participating (as an employee, consultant, contractor or otherwise) in the conduct of the other business or activities" of the registered LLP. Missouri's statute does not contain this additional qualification of the nature of debts or obligations.

20 Among the states restricting the use of LLPs by attorneys or requiring a rule of court are: Delaware, Florida, Illinois, Indiana, Kentucky, Massachusetts, Nevada, New Jersey, and Wisconsin. Sheldon Banoff and Robert Keatinge, Forms of Limited Liability Organization for Lawyers Chart (3/25/96), Partnerships Revisited, ALI-ABA Satellite Seminar (June 18, 1996).

21 Missouri HB 558 authorizing the creation of LLPs became effective August 28, 1995. Passed during the last week of the 1995 legislative session of the 88th General Assembly, this Senate Committee Substitute for House Committee Substitute for HB 558 was primarily a bill intended to amend securities and bankruptcy law. Because of the slower progress of the original LLP proposal (SB 106) assigned to the Senate Judiciary Committee, the LLP authorization was added to House Bill 558. Floor amendments in the House lowered various filing fees associated with establishing an LLP. No hearing was held on the broader language adopted in Missouri's current statute.

The original Senate version contained narrower generation two language, which was more typical of LLP statutes in most other jurisdictions at that time:

Subject to subsection 3 of this section, a partner . . . is not liable directly or indirectly, including by way of indemnification, contribution, assessment, or otherwise, for any DEBTS, OBLIGATIONS and LIABILITIES of, or chargeable to, the PARTNERSHIP, whether in TORT, CONTRACT or otherwise, arising from negligence, wrongful acts, omissions, misconduct, or malpractice by another partner or an employee, agent, or representative of the partnership committed while the partnership is a registered limited liability partnership. (Emphasis added).

The highlighted language (above) linking the liability limitation to negligence or malpractice is noticeably absent from the final version of § 358.150.2, RSMo, as enacted in HB 558. By permitting limited liability for any torts or contract obligations "incurred, created or assumed" by the LLP partnership, the intent was to broaden the scope of liability protection.

22 Section 358.150(2), RSMo.

23 Mass. Ann. Laws Supp. § 108A.15(2) (Law. Co-op 1997). Although the basic shield language is nearly identical, Massachusetts does not specify that a partner is still liable for the wrongful acts of those under his or her "direct supervision and control." While Wisconsin's language also strongly resembles Missouri's, the Wisconsin statute contains both the general liability shield for "any debt, obligation or liability of the partnership, whether in tort, contract or otherwise," but then added clarification that this broad shield is to also include "any debt, obligation or liability arising from omissions, negligence, wrongful acts, misconduct or malpractice . . . ." Wis. Stat. Ann. § 178.12(2) (West 1996). In this way, the Wisconsin statute bridges the gap between second and third generation statutes.

24 See Mont. Code Ann. § 35-10-307(2) (1996) and S.D. Codified Laws Supp. § 48-2-15 (Michie 1995).

25 Cal. Corp. Code § 15015 (b) (Deering 1996).

26 Md. Code Ann. Corps. & Ass'ns § 9-307(B) (Supp. 1996).

27 Section 358.150.3, RSMo 1996; Missouri and most state statutes also retain vicarious liability for the wrongdoing of those under the partner's "direct supervision and control."

28 The 1995 Proposed Prototype LLP statute, designed by the American Bar Association, Business Law Section, Committee on Partnerships and Unincorporated Business Organizations, Working Group on Registered Limited Liability Partnerships (Aug. 8, 1995), was developed to be used as additions and deletions to the Revised Uniform Partnership Act (1994). This Prototype was then submitted to NCCUSL for review.

29 These LLP amendments to the RUPA were considered at the ABA Partnership and Unincorporated Associations Committee meeting Nov. 7, 1996.

30 A RUPA partnership is a separate entity, differing from the aggregate approach of the UPA and current Missouri law.

31 NCCUSL Draft LLP Amendments to RUPA § 306(c) (draft July 12-19, 1996).

32 NCCUSL Draft LLP Amendments to RUPA § 306(b) (July 12-19, 1996) also shields a new partner from personal liability on a pre-existing partnership obligation.

33 Section 358.150.3, RSMo 1996.

34 Cal. Corp. Code § 15015(d) (Deering 1996); Colo. Rev. Stat. § 7-60-115(2) (Supp. 1996); Ga. Code Ann. § 14-8-15 (Supp. 1996); Ind. Code Ann. § 23-4-1 (Michie Supp. 1996); Ky. Rev.Stat. Ann. § 262.20(3) (Michie 1995); La. Rev. Stat. Ann. § 9:3431 (West Supp. 1997); Mass. Ann. Laws Supp. ch. 108A, § 15(3) (Law Co-op 1996); Utah Code Ann. § 48-1-12(2)(b) (Supp. 1996).

35 S.C. Code Ann. § 33-41-370(D) (Law Co-op Supp. 1996).

36 NCCUSL debated this dilemma at its July 1996 meeting, but opted not to include special language addressing the law firm situation. States may, nonetheless, need to include such language preserving supervisory liability to protect employees from the "unauthorized practice of law," as well as to coincide with Supreme Court rules and ethical considerations. Language should be included that retains liability of a partner for the acts of those under the partner's "direct supervision and control." Query whether a state would want to make a distinction in this area between professional LLPs and other service-oriented or trade-based LLPs.

37 Section 359,491(1), RSMo.

38 Section 358.500.3, RSMo 1996; NCCUSL Draft LLP Amendments § 106(b) yields a similar result with regard to liability. Limited partnership law (RULPA) has a similar provision.

39 Section 358.500.4, RSMo 1996; NCCUSL Draft LLP Amendments § 1101(a) yields a similar result.

40 Section 358.500.2, RSMo 1996, specifies that the legal existence of a Missouri LLP "shall be granted full faith and credit."

41 Sections 358.440 through 358.460, RSMo 1996. A written application to become a LLP must be filed in duplicate, containing information set forth in that section and be signed by a majority of the partners (or their authorized representative). A partnership becomes a LLP on the date of filing (if in proper form with the accompanying filing fee), § 358.440.5, RSMo 1996.

42 Section 358.450(1), RSMo 1996. Most states have similar LLP designations, except Ohio, where it is called a Registered Partnership Having Limited Liability.

43 Section 358.480, RSMo 1996.

44 Some states require publication of the LLP status in a newspaper. New York, for example, requires publication of a notice for six weeks in two newspapers before the LLP status is an effective shield. NY Partnership Law § 12-1500(a) (McKinney, 1988).

45 LLP related fees vary widely from state to state. In Missouri, most filings must be accompanied by a fee, for example, $25 to reserve the name (§ 358.460.3, RSMo 1996); a application fee of $25 per partner (up to $100) is required (§ 358.440.3, RSMo 1996) and renewal filings are $100 (plus $50 per each new partner, up to $200). Foreign LLPs must also register and pay $50 to do business in Missouri. There are other incidental fees, such as changes in registered agent ($2), office ($25), amendments ($20), and addition of partners ($50).

46 See Tex. Rev. Civ. Stat. Ann. art. 6132b-3.08(d) (1995), $100,000 errors and omissions liability insurance or trust fund and subsequent note regarding insurance.

47 Section 358.510, RSMo 1996; 1997 MO. S.B. 0269 would officially create registered limited liability limited partnerships with the same protections as LLPs (proposed §259.172).

48 Section 358.440, RSMo 1996.

49 Any changes in the filing or a withdrawal notice generally must be signed by a majority of the partners or by one authorized to sign on behalf of such majority. Section 358.440, RSMo 1996.

50 Section 358.440.6, RSMo 1996; LLP registration may be renewed BEFORE the expiration date, § 358.440.9, RSMo 1996.

51 Since no annual registration is required for a business to be classified as a general partnership, two or more individuals or businesses operating "as co-owners [of] a business for profit" — without filing to become a corporation, LLC, LP or LLP — will be treated as a traditional general partnership. Section 358.065, RSMo 1996, requires all partnership to comply with registration of fictitious names under § 417.210, RSMo 1996. Failure to register under Missouri's fictitious name statute does not affect the partnership liability provisions.

52 Section 358.440(20), RSMo 1996.

53 See NCCUSL "sving clause," § 1001(f). The Proposed Prototype § 912(d) specified 30 days after the mailing of the notice, but the NCCUSL Draft LLP Amendments (July 12-19, 1996) § 1003(c) expand that to 60 days.

54 Proposed Prototype § 910(d).

55 A business continuation agreement should be used.

56 NCCUSL Draft LLP Amendments (July 12-19, 1996) § 408.

57 NCCUSL Draft LLP Amendments (July 12-19, 1996) § 1001(d) comment allows LLP status to remain in effect "regardless of changes in the partnership" until LLP status is revoked (§ 1003) or cancelled (§ 1001(g)). Normally unanimous consent of the partners would be required to change status unless a lesser number is required to amend the partnership agreement. (See § 1107(a)(1)). The protection applies to both domestic LLPs and (foreign) LLPs created in another state.

58 Section 347.125.4, RSMo 1996, also provides for a prospective liability shield in newly formed LLCs.

59 See § 516.120(5), RSMo, and Gilmore v. Chicago Title Ins. Co. et al, 926 S.W.2d 695 (Mo. App. E.D. 1996).

60 Comments to NCCUSL Draft § 306; Minn. Stat. § 323.14 (West Supp. 1997).

61 In Missouri one may need to look to language in existing statutes of limitations, statutes of repose and rules of court concerning when a claim arises. Does a claim arise at the same time that a debt or obligation is incurred? Clarifying definitions are needed in Missouri's partnership law.

62 Under this rationale, if a partnership fails to renew LLP status after one year and then refiles two months later, are the partners liable only on the installment or debts incurred during the two months or are they liable for the entire debt? The ABA Proposed Prototype § 910(d) provisions would grandfather in the liability shield to protect the partners who renewed LLP status late (within two years) to prevent liability on any contract initially made while the partnership was an LLP.

63 A general partnership as "an association of two or more persons to carry on as co-owners a business for profit," UPA § 6.

64 Unif. Partnership Act §§ 260, 261, 6 U.L.A. 15 (1995); see also UPA § 15. Missouri and the RUPA have joint and several liability for all debts and obligations, even those derived from contracts. Section 358.150(1), RSMo.

65 Both Missouri and the RUPA adopt this asset exhaustion concept. See Wills v. Wills, 750 S.W.2d 567 (Mo. App. E.D. 1988). Conversely, personal creditors can only reach a partner's interest in a partnership through a "charging order," and must attempt to satisfy a judgment from personal assets first.

66 Details and an in-depth analysis of changes the RUPA would make in general partnership law are beyond the scope of this article.

67 Alan R. Bromberg, Larry E. Rib- stein, Bromberg and Ribstein on Limited Liability Partnerships and the Revised Uniform Partnership Act 284 (Little Brown 1997) (1996); RUPA § 201.

68 Several states do require insurance: Tex. Rev. Civ. Stat. Ann. art. 6132b-3.08(d) (1995), $100,000 errors and omissions liability insurance or trust fund; CAL. $100,000 E & O per licensed person, up to $5 million for CPAs and $7.5 million for attorneys; DEL. $1 million fund; D.C. $100,000; FLA. $100,000 per general partner up to $3 million per partnership; MASS. amount to be determined by professional board; N.M. $500,000 per occurrence beyond deductible; PA $100,000 beyond deductible per partner, up to $1 million per partnership; S.C. $100,000 beyond deductible; VA $500,000 beyond deductible; WASH. $1 million insurance or financial responsibility. Chart at 153 - 164, Partnerships Revisited, ALI-ABA Satellite Seminar (June 18, 1996).

69 Section 358.150.4, RSMo 1996.

70 NCCUSL Comments to § 306 emphasize that personal assets of the culpable partner, as well as assets of the partnership, are available to the creditor.

71 Pending legislation would require any agreement to contribute capital to an LLP to be WRITTEN and SIGNED by the contributing partner, but would not allow third party (creditors) to enforce that agreement without the consent of the parter or assignment by the partnership. See 1997 MO H.B. 655.

72 In Idaho a LLP partner is liable for only debts and obligations "for which the partner has expressly agreed in writing to be liable," Idaho Code § 53-315.3 (1996).

73 Ore. Rev. Stat. § 68.270 (1996); N.Y. Partnership Law § 26(d) (McKinney, 1997); Alabama requires an agreement of all of the partners to override the liability shield (1996 Ala. Acts 528).

74 Coventry Manor Phase II Assocs. v. Hainen, 904 S.W.2d 279 (Mo. App. W.D. 1995); the case involved a limited partnership, not a LLP, which had a partnership agreement which required periodic contributions by both general and limited partners.

75 Section 358.180(2), RSMo 1996.

76 Section 358.150.2, RSMo 1996.

77 Sections 359.291 through 359.391, RSMo 1996.

78 1997 MO. S.B. 0269 would limit the situations in which a withdrawing LLP partner could demand distribution of his interest and would authorize the partnership to purchase that interest for fair value; partners authorizing prohibited distributions could have personal liability to the LLP for three years.

79 ABA Committee on Partnerships and Unincorporated Business Organizations, X PUBOGRAM 10 (Oct. 1995).

80 See Dwyer v. ING Inv. Co., Inc., 889 S.W.2d 902 (Mo. App. E.D. 1994), where the sole shareholder in a S corporation knowingly caused the corporation to operate at a loss for pass-through taxation loss advantages for the shareholder, thereby generating insufficient profits to pay amounts due on an equipment lease, this corporation was operated as a fraud on creditors and the corporate veil could be pierced to hold the shareholder personally liable. The sole shareholder prevented the corporation from working on a profit generating contract and instructed workers to work on the "at cost" contract for the manufacture of garments for a partnership in which he was the partner. He was thereby controlling the entity for his benefit alone without a profit objective. The "shell" corporation can be pierced to reach the shareholder. Because of the wrongful interference with the production of the other business order/relationship, the partners can be held jointly and severally liable to the injured creditors also.

81 See Minn. Stat. Ann. § 323.14.3 (1994).

82 Minn. Stat. Ann. § 323.14.3(b) (1995) provides that case law related to piercing of the corporate veil also applies to LLPs; however, "use of informal procedures or arrangements for managing the limited liability partnership . . . is not a ground for piercing the veil of the limited liability partnership." Missouri does not have a similar statutory provision.

83 Section 358.160.1(2), RSMo 1996.

84 Section 358.160.1, RSMo 1996.

85 Ch. 359, RSMo. Missouri changed its limited partnership law in 1985 (with a two year phase-in period) to the provisions modeled after the Revised Uniform Limited Partnership Act (RULPA).

86 Section 359.201.1, RSMo 1996: A "limited partner is not liable for the obligations of a limited partnership . . . [except to] persons who transact business with the limited partnership reasonably believing, based on the limited partner's conduct, that the limited partner is a general partner."

87 Section 359.201.2, RSMo 1996.

88 Missouri Secretary of State comments at meeting of Business Law Committee of The Missouri Bar (May 10, 1996).

89 42 U.S.C. §§ 9601, et seq. (1994); see especially CERCLA, 42 U.S.C. § 9607(b) (1994); owners and operators or controllers of sites where hazardous wastes are generated, transported or stored have joint and several liability under CERCLA.

90 See the Missouri case of United States v. Northeastern Pharmaceutical & Chemical Co., Inc. (NEPACCO), 810 F.2d 726 (8th Cir. 1986), and see also, United States v. Mexico Feed and Seed Co., Inc., 980 F.2d 478 (8th Cir. 1992); further liability may result from destruction of records under 42 U.S.C. § 9603(d)(2) (1994).

91 Section 347.057, RSMo 1996.

92 Section 347.059, RSMo 1996.

93 Section 347.095, RSMo 1996.

94 Section 358.150.3, RSMo 1996.

95 The original LLP bill (SB 10) on which hearings were held in the Judiciary Committee contained second generation language with a narrower liability shield for LLP partners. SB 106 was not reported out of committee, so the current Missouri LLP liability shield language was an appendage as a rider to the security regulation revisions of HB 558 for passage in the last week of the 1995 legislative session. Considering the haste with which the language substitution was made, it is doubtful that differences in language from the LLC statute was even a consideration, let alone an intentional reservation of joint and several liability for claims that culminate in court decrees against the partnership (or other partners). See Philip N. Krause, Missouri Adopts Limited Liability Partnership Act, 2 MBL QUARTERLY 4, 4-8 (Summer 1995) for more historical background on the legislative history and development of the Missouri LLP statutory proposals.

96 Sections 347.109 and 347.141.5, RSMo 1996.

97 Section 347.099.1, RSMo 1996.

98 Simplification of Entity Classifications Rule, 61 Fed. Reg. 21989 (1996) - rule revising IRS Proc. and Treas. Reg. § 301.7701-1 through 7701-3.

99 C.F.R. § 301.7701-3(b)(1)(i) (1996), Partnerships Revisited, ALI-ABA Satellite Seminar Study Materials 7 (June 18, 1996).

100 Simplification of Entity Classification Rule, 61 Fed. Reg. 21989 (1996) - rule revising IRS Proc. and Treas. Reg. § 301.7701-1 through 7701-3.

101 1997 MO. H.B. 757 and 1997 MO. H.B. 655 include corrective language to again permit one member LLCs; H.B. 757 would also amend the definition of "person" in the LLC chapter to include any "business or not for profit entity."

102 James L. Dam, One Member LLCs Can Be Created Now, 96 LWUSA 545 (June 17, 1996); Treas. Reg. § 301.7701-3(c)(2).

103 In a few states, such as Florida and Pennsylvania, LLCs do not receive pass-through treatment for state income taxes. XI Pubogram 6 (Dec., 1996).

104 Treas. Reg. § 301.7701-3(b)(2).

105 Partnerships with more than 100 members may incur corporate tax unless at least 90% of the income is "qualifying income." Partnerships, Check-the-box Prompts Need for Clarifying Qualifying Income, Daily Report for Executives, BUREAU of NATIONAL AFFAIRS, INC. (June 14, 1996).

106 Sidney Kess, Entity Treatment: A Matter of Choice, NEW YORK LAW J. (June 3, 1996) at 3.

107 See I.R.C. §§ 1361-1380.

108 Treas. Reg. § 301.7701-2(a) and IRS Proc. and Admin. Reg. § 301.7701-(2)(1), based on Morrissey v. Commissioner, 296 U.S. 344 (1935). There were six factors, but the characteristics of "Associates" and "objective to carry on business and divided its gains" are typical of corporations and partnerships.

109 IRS Rev. Rul. 88-76 (1988).

110 Darn, J. L. LLCs Get Big Boost, Lawyers Weekly USA A1, 12 (Jan. 16, 1995).

111 See Darn at A1, finding the majority approval consistent with IRS Rev. Rul. 95-10.

112 See, for example, early versions of Wyo. Stat. Ann. § 17-15-123 (Michie 1977), and Colo. Rev. Stat. §§ 7-80-101 (1996).

113 IRS Rev. Rul. 93-91 and 93-98; Texas Priv. Ltr. Rul. 92-10-019 suggests that approval by members possessing at least 20% in interest may be sufficient.

114 Limited partner status is necessary to avoid self-employment tax. Prop. Treas. Reg. § 1.1402(a)-2 [Reg-209824-96 (Rin 1545-AU24)] specifies that a member can be considered a "limited partner" unless the member (a) has personal liability for the obligations of the LLC -2(h)(i), (b) has agency authority under the law of the domestic state of its formation -2(h)(2)(ii), (c) has participated in the trade or business for more than 500 hours during the past year -2(h)(5).

115 Devine v. Stone, Leyton & Gersham, P.C., 100 F.3d 78 (8th Cir. 1996).

116 Business entity interests which are publicly traded will be taxed as corporate interest, however. See, Treas. Reg. § 301.7704 and Appendix A, Partnerships Revisited, ALI-ABA Satellite Seminar Study Materials 6 (June 18, 1996) See proposed legislation in Missouri (1997).

117 Other tax issues related to qualified retirement plans, self-employment and capital gains are beyond the scope of this article. Some tax concerns remain concerning changes instituted by the Revenue Reconciliation Act of 1993 (RRA) that will make it more likely that disbursements will trigger capital gains in some business organizations. "Professional service partnerships," however, can continue to treat payments for a retiring general partner's share of unrealized receivables and goodwill as distributions of partnership income or guaranteed payments — which can be recognized as ordinary income in the year of distribution (rather than as a capital gain). It is not certain whether LLPs and LLCs will qualify as "professional service partnerships" under RRA's changes to IRC § 736. ABA, Section of Business Law, X Pubogram 16, 17 (July 1996).

118 See In the Matter of Daugherty Construction, Inc., 188 Bankr. 607 (Bankr. D. Neb. 1995), and In re DeLuca, 194 Bankr. 65 (Bankr. E.D. Va. 1996), discussing whether or not state law and operating agreements concerning dissolution and replacement of bankrupt manager-members are enforceable in federal bankruptcy proceedings.

119 See Gerald J. Robinson, Limited Liability Companies vs. S Corps - Which Provides the Most Tax Benefits?, Real Estate Tax Ideas (LEXIS March 1996): A LLC member's basis may include its allocable share of a mortgage (even though the member is not personally liable on the mortgage), while an S corporation shareholder's basis does not. I.R.C. § 752(c). LLC members receive a similar advantage with refinanced mortgages and could receive proceeds up to their basis. I.R.C. § 731(a). Appreciated property distributed to LLC members is not immediately subject to taxation (until it is later transferred), since the LLC member can take the basis of the LLC; S shareholders, however, realize the gain immediately upon disbursement of the property to the shareholder.

120 Alan R. Bromberg & Larry E. Ribstein, Bromberg & Ribstein on Limited liability and the Revised Uniform Partnership Act 307 (Little, Brown 1997) (1996). The RUPA § 401 uses the concept of a partner being chargeable with a share of the losses rather than the UPA terminology of "contribution."

121 Connecticut, Florida, North Dakota, and West Virginia based their 1995 RUPA type statutes on the 1994 form, while statutes passed in 1993 in Texas, Montana, and Wyoming were based on an earlier version. None have the NCCUSL draft language for the LLP add-on to the RUPA. Partnerships Revisited, ALI-ABA Satellite Seminar (June 18, 1996) indicated 10 states had adopted the RUPA.

122 There are numerous other sections of the RUPA worthy of consideration but beyond the scope of this article. Some other RUPA key provisions clarify (a) the nature of required fiduciary duties of loyalty and due care, RUPA § 404; (b) provisions related to buy-out of a partner's interest provisions are included, RUPA § 701; (c) marshalling of assets, § 307; and (d) filings to minimize apparent authority of partners or former partners. RUPA § 303 permits a partnership to file a "statement of partnership authority" designating which partners are authorized to execute instruments related to real estate. Notice with the Secretary of State's office may also be filed, which would cut off apparent authority of a dissociated partner to act in a certain manner. For this notice to be effective with respect to real estate, an additional notice must be filed in the county where the real estate is located. RUPA § 704 provides for constructive notice of dissociation of a partner 90 days after the filing of a statement of dissociation with the Secretary of State's office. Without such filing, apparent authority may continue for two years, RUPA § 702.

123 RUPA § 201. The entity concept affects several other provisions as well. For example, it abolishes the concept of "tenancy in partnership" as a method for co-ownership of partnership property abolished and replaced with ownership of property by the partnership itself, RUPA § 501, for greater consistency with the entitytheory. A partnership may sue and be sued in its own name, § 307. Even though entity status is adopted, general partners in a non-LLP have joint and several liability for debts and obligations of the partnership. RUPA § 306(a).

124 A "dissociation" is "a change in the relationship of the partners caused by any partner ceasing to be associated with the carrying on of business." This is the old definition for dissolution. Dissolution under the RUPA is the beginning of the winding up process. Dissociation occurs whenever a partner dies or resigns, and for other reasons listed in the model act. Not all dissociations result in dissolution of the partnership; the basis for dissolution varies in partnerships at-will versus term partnerships. Depending on the reason and timing of the dissociation, distributions to exiting partners may be delayed (thereby adding protection both for the continuation of the business and its ability to meet its outside debts as they come due). See especially RUPA §§ 801, 601, 602, & 603(B).

125 The subcommittee is chaired by John Niemoeller and the author of this article is a member of the subcommittee.

© 1997, Carol J. Miller