Limited Partnerships, LLPs, and LLCs

Limited Partnerships: Structure and Formation

A limited partnership (LP) is a partnership with two classes of partners: at least one general partner and at least one limited partner. The general partner manages the business and bears unlimited personal liability for partnership obligations, exactly like a partner in a general partnership. The limited partner is essentially a passive investor: the limited partner's liability is limited to the amount of capital contributed, and the limited partner has no right to manage or control the business in the traditional model.

Unlike a general partnership, an LP cannot arise by conduct — it is a statutory entity that exists only upon filing. To form an LP, the organizers must file a certificate of limited partnership with the secretary of state, setting out the name of the LP (which must include a designation such as "LP"), the address of the office and agent for service of process, and the name and address of each general partner. Failure to file means no LP exists, and the would-be limited partners risk being treated as general partners with unlimited liability.

The internal affairs of the LP are governed by a limited partnership agreement, with the statute supplying defaults. The same person may be both a general and a limited partner. A general partner of an LP owes the LP and the other partners the same fiduciary duties of loyalty and care that govern general partners; limited partners traditionally owe no fiduciary duties by virtue of being limited partners, reflecting their passive role, though they owe the obligation of good faith and fair dealing.

The Control Rule and the Modern Limited-Partner Shield

The most heavily tested LP issue is whether a limited partner can lose the liability shield. Under the older Revised Uniform Limited Partnership Act (RULPA), a limited partner who participated in the control of the business became liable like a general partner — but only to persons who transacted business reasonably believing, based on the limited partner's conduct, that the limited partner was a general partner.

RULPA softened this "control rule" with a list of safe harbors: a limited partner did not lose protection merely by being an agent, employee, or contractor of the LP; consulting with or advising a general partner; acting as a guarantor; attending or voting at meetings of partners; or voting on enumerated extraordinary matters such as dissolution, admission or removal of a partner, or amendment of the agreement.

The modern Uniform Limited Partnership Act (ULPA 2001) abolished the control rule entirely, giving limited partners a full liability shield regardless of how much they participate in management — a limited partner "is not personally liable" for an LP obligation "even if the limited partner participates in the management and control of the limited partnership." California's Uniform Limited Partnership Act of 2008 (Corp. Code §15900 et seq.) follows this modern approach, so a California limited partner generally retains the shield even when active in management;

the limited partner's exposure is to return of wrongful distributions and to liability the limited partner separately assumes (for example, as a guarantor or by also being a general partner).

On the bar, identify which act governs: if the fact pattern invokes the older control rule, analyze participation in control and the safe harbors; under the modern act and California, the limited partner keeps the shield. A limited partner who knowingly permits her name to be used improperly, or who receives a distribution that renders the LP insolvent, can still incur targeted liability.

Limited Liability Partnerships (LLPs)

A limited liability partnership (LLP) is a general partnership in which the partners have elected, by filing a statement of qualification (or registration) with the state, to obtain a liability shield. The hallmark of the LLP is that a partner is not personally liable, solely by reason of being a partner, for the debts and obligations of the partnership, whether arising in contract or tort, including obligations arising from the negligence, malpractice, or misconduct of another partner or of the firm's agents.

The shield protects a partner's personal assets from vicarious liability; it does not shield a partner from liability for the partner's own wrongful conduct, and a negligent partner remains personally liable for her own malpractice. The LLP form is especially popular among professional service firms (lawyers, accountants) precisely because it lets one partner avoid being personally ruined by another partner's malpractice while the firm's assets still answer for the claim.

California imposes a notable restriction: only certain licensed professionals may practice through an LLP — practice of law, public accountancy, architecture, engineering, and land surveying (with the related-services and out-of-state firm provisions in the Corporations Code). California also requires registered LLPs to maintain security for claims (such as insurance or segregated funds) as a condition of the liability shield, protecting clients who could be harmed by malpractice.

Operationally, an LLP is governed by general partnership law (RUPA) except for the liability shield; the partners share profits and management under the same RUPA defaults, owe the same fiduciary duties, and remain agents of the partnership. The shield is the central distinction, and it can be lost if the firm fails to maintain its registration or the required security.

Limited Liability Companies (LLCs)

The limited liability company (LLC) is the modern default vehicle for closely held businesses because it combines the limited liability of a corporation with the pass-through taxation and management flexibility of a partnership. The owners are members, and every member enjoys a liability shield: a member is not personally liable for the LLC's debts and obligations solely by reason of being a member or manager. An LLC is formed by filing articles of organization with the secretary of state, and its internal governance is set by an operating agreement (which may be oral or written and need not be filed).

The operating agreement controls; the statute supplies defaults and a short list of non-waivable provisions (such as the inability to eliminate the duty of loyalty entirely or to restrict access to records unreasonably).

LLCs may be member-managed (the default — every member has equal management rights and is an agent of the LLC) or manager-managed (members elect managers who run the business, and non-manager members lack agency authority). Members owe fiduciary duties of loyalty and care to the LLC, analogous to partners' duties; in a manager-managed LLC, those duties run principally to the managers, and a non-managing member generally owes no fiduciary duties.

Default financial rules vary by statute: under RULLCA, distributions are made in equal shares (per capita) rather than by contribution, whereas many older acts default to contribution-based shares — so always check the governing statute.

A member's transferable interest (right to distributions) is personal property reachable by a charging order, but transfer does not convey management rights or member status. California governs LLCs under the Revised Uniform Limited Liability Company Act (RULLCA), Corporations Code §17701.01 et seq., which makes member-management the default, allows perpetual duration, codifies the loyalty/care duties, and provides the charging order as the exclusive remedy of a member's personal creditor.