A registered limited liability partnership offers a certain amount of liability protection to its partners. A registered limited liability partnership is any general or limited partnership that registers with the Texas secretary of state. This registration gives both general, as well as limited, partners some protection against individual liability to third parties for the actions of other partners. A partner in a registered limited liability partnership is not individually liable, directly or indirectly, by contribution, indemnity, or otherwise, for debts and obligations of the partnership incurred while the partnership is a registered limited liability partnership, unless arising from improper actions or omissions of the partners.
This means that a partner in a registered limited liability partnership is not individually liable for debts and obligations of the partnership, if the errors, omissions, negligence, incompetence, or malfeasance triggering the liability were committed while the partnership is a registered limited liability partnership, in the course of the partnership’s business by another partner or a representative of the partnership, and that person was not working under the supervision or direction of the partner seeking to avoid liability.
There are circumstances where a partner cannot avoid liability, even in the context of being a partner in a registered limited liability partnership. For example, a partner will be liable for the acts of a partner or representative of the partnership if the partner either: (i) was directly involved in the specific activity in which the errors, omissions, negligence, incompetence, or malfeasance were committed by the other partner or representative; or (ii) had notice or knowledge of the errors, omissions, negligence, incompetence, or malfeasance by the other partner or representative at the time of occurrence and then did not take reasonable steps to prevent or cure the errors, omissions, negligence, incompetence, or malfeasance.
The registration process included filing an annual registration form with the secretary of state. The statutes require that a registered limited liability partnership must give notice of its status by requiring that the last words in its name be “registered limited liability partnership” or the abbreviation “L.L.P”. A further requirement is that a registered limited liability partnership must either carry a liability policy of at least $100,000 covering errors, omissions, negligence, incompetence or malfeasance or provide $100,000 of funds specifically designated and segregated for the satisfaction of judgments against the partnership based on such errors, omissions, negligence, incompetence or malfeasance. If the partnership chooses to post the $100,000 rather than purchase liability insurance, it must either deposit (in trust or a bank escrow) $100,000 of cash, bank certificates of deposit, or United States Treasury obligations, or a bank letter of credit or insurance company bond.
An alternative to a limited partnership or a registered limited liability partnership is the limited liability company. A limited liability company is organized and maintained under the Texas Limited Liability Company Act and can have both the powers of a corporation and the powers of a limited partnership.
The limited liability company form of doing business protects its “members” (similar to shareholders in a corporation) and “managers” (similar to directors in a corporation) from liability to third parties. Unless a company's company agreement specifically provide otherwise, a member or manager of a limited liability company is not liable for the debts, obligations, or liabilities of a limited liability company, including those represented by a judgment, decree, or order of a court. Further, a member of a limited liability company is not a proper party to a lawsuit against a limited liability company, unless the suit is one to enforce a member's right against or liability to the company.
A limited liability company is formed by filing a certificate of formation with the Texas secretary of state. A limited liability company may elect to be classified for federal tax purposes as either a partnership or an association taxable as a corporation. Because a member of the limited liability company may actively participate in the management of the entity, this may result in having income and loss from the limited liability company escape from tax treatment as “passive” income or loss.
For more information, please see the accompanying articles: Choice of Entity, Corporations and Corporate Responsibilities, Texas Limited Liability Companies-Formation and Advantages, Benefits of a Limited Partnership, Conversion of a Corporation to a Limited Partnership
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