California Bar Journal
OFFICIAL PUBLICATION OF THE STATE BAR OF CALIFORNIA - MARCH 1999
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MCLE SELF-STUDY

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Limited Liability Partnerships

What you need to know about new law and your LLP

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By DEAN I. FRIEDMAN
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With the new year comes the exclusive application of the Uniform Partnership Act of 1994 (California Corporations Code ("Cal. Corp. C.") 16100 through 16692, inclusive, generally, the "UPA," or specific reference to sections thereof) to all California limited liability law partnerships (and all foreign limited liability law partnerships conducting intrastate business) (domestic or foreign "LLP"). The former California Uniform Partnership Act (Cal. Corp. C. 15001 through 15058, inclusive) has been repealed. Prior to 1998, an LLP which registered on or before Dec. 31, 1996, was governed by the former statutory provisions (and an LLP which registered on or after Jan. 1, 1997, could have elected to be governed by the former statutory provisions.)

Dean I. FriedmanDomestic LLPs must satisfy the initial and annual renewal registration requirements of the California secretary of state and the State Bar (annual renewal relative only to filing with the State Bar) to secure limited liability protection against damages caused by certain tortious and contractual breach conduct. (Cal. Corp. C. 16306(c)). First, the domestic LLP must register with the California secretary of state. Second, Cal. Corp. C. 16306(f) requires that a Certificate of Registration as a Limited Liability Partnership be issued by the State Bar. To implement this latter requirement, the State Bar has adopted the Limited Liability Partnerships Rules and Regulations (California Court Rules - Attorneys and State Bar ("LLP Rules")). The LLP Rules were first approved by the State Bar board of governors on Oct. 28, 1995 (effective Jan. 1, 1996). The LLP Rules were revised as recently as June 1, 1997. Third, the LLP must also meet certain security requirements. (Cal. Corp. C. 16956). Foreign LLPs are subject to special rules regarding registration which are discussed below.

Registration

Updated information concerning LLP registration with the secretary of state can be obtained from its web site at www.ss.ca.gov/business/llp. The business filings section LLP unit provides forms with instructions and a fee schedule. All of the available forms may be downloaded and printed through portable document format (PDF) and completed for submission by mail. In addition, a listing of frequently asked questions (FAQs) and answers is posted along with links to other resources and a means of electronically contacting the business filings section LLP unit.

Form LLP-1

In order to become a registered LLP, a general partnership must file Form LLP-1, Registered Limited Liability Partnership, with the secretary of state (Limited Liability Partnership Unit). There presently is a $70 filing fee (as set by statute). The registration must be completed in compliance with Cal. Corp. C 16951 through 16962, inclusive. In particular, Cal. Corp. C. 16955(a) provides that a domestic law partnership may convert to an LLP by majority vote or by a different vote as may be required in its partnership agreement. (Cal. Corp. C. 16953(a) permits any partnership, other than a limited partnership, to register.)

Item 11 of LLP-1 requires execution by one or more authorized partners. Presumably, the vote of the partners possessing a majority profits interest (or other means of voting) must include the appropriate delegation of authority to a partner or partners to execute and file the registration. Generally, the registration is effective as of the date of receipt by the California secretary of state. However, Item 9 permits a delayed effective date.

For example, a law firm may decide to use a delayed effective date of registration so as to comport with an appropriate accounting period or fiscal year. A foreign LLP must also register with the California secretary of state (in order to lawfully conduct intrastate business, meaning repeatedly and successively providing legal services). In that case, a certificate of good standing from the jurisdiction under which the foreign LLP is organized must also be submitted. (Cal. Corp. C. 16959(a)(2)).

Form LLP-2

Cal. Corp. C. 16954(a) provides that the original registration must be amended under certain circumstances. An amendment must be filed with the California secretary of state as soon as reasonably practical after any information set forth in the original registration, or any previously filed amended registration, becomes inaccurate, or to add information to the original registration or amended registration. For registered LLP terminations, there is no timeliness provision with respect to the filing of a notice of cessation. With respect to both registration and amendments and cessation notices, Form LLP-2, Amendment to Registration of Limited Liability Partnership, is used accompanied by a $30 filing fee (mandated by statute, Cal. Corp. C. 16954(d)). The specific information to be reported in the amended registration includes changes in the LLP name, the address of its principal office, the name of its agent for service of process, a change in the delayed effective date of the original registration, or any other matter reported in the original registration, or any previously amended registration, which has materially changed.

Form LLP-4

Several provisions of the UPA concern termination of registered LLP status. These are Cal. Corp. C. 16954(b) (domestic LLPs), 16960(b) and 16960(c) (foreign LLPs ceasing or otherwise no longer required to be registered). Cal. Corp. C. 16954(b) requires the filing with the California secretary of state of a notice if an LLP ceases to be a registered LLP. Form LLP-4, Limited Liability Partnership Notice of Change of Status, is used accompanied by a $30 filing fee.

Registration with the bar

Cal. Corp. C. 16306(f) provides that the limitation upon a partner's vicarious liability for claims based upon acts, errors or omissions arising from legal services does not apply unless the registered LLP has a currently effective certificate issued by the State Bar (office of certification, phone: 415/538-2100, press option 3 to connect with the LLP information line, then press option 1 for information about receiving an application by fax or mail). LLP Rules 1.0 requires California attorneys to register to practice law as an LLP. Additionally, LLP Rules 10.0 requires each LLP to file an annual renewal. Failure to complete the annual renewal results in involuntary termination of the LLP as a registered LLP. (LLP Rules 8.1.1).

Certificate of registration

In order to obtain a certificate of registration, all domestic and foreign LLPs conducting intrastate business must file an application on a form published by the bar's office of certification. Forms may be obtained through fax on demand (application fax retrieval phone number 415/561-8883 if calling from a fax machine equipped with telephone handset; press option 6 to receive an LLP application packet). There is presently a non-refundable $50 per partner filing fee (not to exceed $2,500 as set by administrative rule).

The names of all LLP partners must be listed on Attachment 1, and the names of all non-partners (including associates, of counsel, contract lawyers and licensed persons sharing office space) must be identified on Attachment 2.

Attachment 3 includes a declaration of an authorized partner made under penalty of perjury of compliance with Rule 1-400, Rules of Professional Conduct (regarding limitations upon advertising and solicitations to prospective clients not constitutionally protected from abridgment). An original, certified copy of LLP-1 as filed with the California secretary of state must also accompany the application. (LLP Rules 4.0 et seq.)

Security for claims

LLP Rules 5.0 et seq. requires all domestic and foreign LLPs (conducting intrastate business) to maintain security for claims of negligent or intentional acts, errors and omissions arising out of the practice of law (by reference to former Cal. Corp. C. 15052, presumably to be amended to refer to Cal. Corp. C. 16956). Otherwise, the limitation on vicarious liability provided by Cal. Corp. C. 16306(c) lapses during any period security is not maintained (again, presumably the rule will be amended to refer to the applicable UPA provision).

Repeal

Amendments made to LLP Rules 5.0 repealed the requirement that a form of written security agreement be submitted to the State Bar (effective June 1, 1997, deleting LLP Rules 5.2 which directed that evidence of the required security for claims be furnished to the State Bar with the original registration application).

Nonetheless, LLP Rules 3.4 requires that all domestic and foreign LLPs have at the time of the filing of the original application for registration (and agree to maintain during the entire period of certification) the security for claims mandated by Cal. Corp. C. 16956.

Annual renewal

To implement the requirement of Cal. Corp. C. 16306(f) that a currently effective certificate of registration be issued by the State Bar, LLP Rules 10.0 requires the filing of an annual renewal. The failure to file the annual renewal results in involuntary termination of the certificate of registration.

The due date for filing the annual renewal is set by the office of certification. For certificates issued on or before Oct. 1, 1998, the renewal due date is Oct. 1, 1999. Certificates issued on or before Oct. 1, 1997, were required to be renewed by a filing submitted no later than Oct. 1, 1998.

The office of certification automatically mails annual renewal forms to all currently registered LLPs, preprinted with the appropriate information of record (LLPs registered before Oct. 1, 1997, were mailed renewal forms on Aug. 3, 1998).

Any changes to the information last furnished must be noted on the form, such as whether the name of the law firm or its address has changed (Part 1), or whether there has been a change in the number of partners and non-partners who practice for the firm including their names and State Bar numbers, or the State Bar Law Corporation Certificate of Registration Number of any incorporated partners or non-partners (Part 2).

However, any change in the name, address or designated partner (authorized to act on behalf of) the LLP must be submitted by special report to the State Bar within 45 days of the change. (See LLP Rules 11.0).

Involuntary termination

Once a certificate of registration has been involuntarily terminated for failure to file timely the required annual renewal, the LLP must file a new Form LLP, Application for Issuance of Certificate of Registration as a Limited Liability Partnership, together with appropriate attachments. A new filing fee (up to $2,500) must also be paid. An original, certified copy of LLP-1 as filed with the California secretary of state must also accompany the application.

Annual renewal fee

The annual renewal fee is determined by the number of LLP partners reflected on the records of the office of certification as of the preceding July 31. The filing fee is $75 for a two-partner firm plus $25 for each additional partner, up to a maximum of $2,500.

Examples

Given the benefits of limited liability protection the properly registered domestic LLP has to offer its partners, it is indeed surprising that some California law firms have failed to complete annual registration renewals (or have even failed to file Form LLP with the office of certification). The personal liability for malpractice or LLP debts and obligations attributable to non-compliance can be astounding:

Example 1: Assume that a four-person registered LLP has a $900,000 money judgment entered against it for the negligence of one of its partners. Assume further that it maintains no malpractice liability coverage. Each non-negligent partner's personal liability is limited to $500,000 determined on a joint and several basis.

Example 2: Assume the facts as Example 1 except that at the time of the error or omission the LLP had failed to file its annual registration renewal with the office of certification. Each partner's personal liability (whether or not that partner acted negligently) reaches to the full amount of the money judgment determined on a joint and several basis.

A review of Cal. Corp. C. 16959(a)(2)(j) and (k) suggests that foreign LLPs may be treated dissimilarly from domestic LLPs relative to the limited liability protections of Cal. Corp. C. 16306(c) solely by reason of the failure to register (either with the California secretary of state or the State Bar).

The following examples demonstrate these consequences:

Example 3: Assume that a 12-person Oregon LLP which conducts intra-state business in California has a $3.5 million money judgment entered in California against its partners (all domiciled in Oregon) for malpractice committed by an associate attorney. Assume that the firm maintains $2 million malpractice liability coverage but has no then-current registration filed with the secretary of state.

While the Oregon LLP may be subject to penalties (of $20 for each day that unauthorized intrastate business is transacted, up to a maximum of $10,000), each partner would not have unlimited joint and several liability ($3.5 million) solely by reason of the LLP's failure to register. (See Cal. Corp. C. 16959(j)).

Even if the LLP had registered with the secretary of state (and the office of certification), the automatic guarantee provision of Cal. Corp. C. 16956(a)(2)(C) would operate to expand the personal liability of each partner beyond the $2 million malpractice liability coverage (unless the law firm also then had a confirmed net worth of at least $15 million (see Cal. Corp. C. 16956(a)(2)(D)). Presumably, collection upon the money judgment could be made in Oregon by filing a sister state judgment.

Example 4: Assume the facts as Example 3 except that the malpractice liability coverage is $7.5 million. Assume further that the law firm has a currently effective registration filed with the State Bar. Each non-negligent partner would have no personal liability for the money judgment and no penalty would be assessable against the Oregon LLP.

Conclusion

Initial application and annual registration renewal with the State Bar is a simple and important matter to complete. Registration renewal is an event which should be calendared by all domestic and foreign LLPs conducting intrastate business. Renewal forms are usually mailed in August and are due by Oct. 1. The stakes for failure to renew timely are far too high to disregard.

The office of certification presently has no discretion to waive timely filing, grant extensions or retroactively recognize late compliance with the renewal requirements of the LLP Rules. Clearly, noncompliance with the administrative registration requirements precludes domestic LLP partners from benefiting under the limited liability protections of Cal. Corp. C. 16306(c).

Examples 3 and 4 given earlier demonstrate that the incentive for registering with the State Bar is less clear for foreign LLPs. Although the California Supreme Court has not addressed the issue to date, nonetheless a comparison of the LLP law of other states suggests that, at all events, compliance with all administrative registration requirements (by both domestic and foreign LLPs) ensures limited liability protection against vicarious liability.

Dean I. Friedman of Clark & Trevithick P.C. of Los Angeles is a certified specialist in taxation law and former chair of the California Board of Legal Specialization of the State Bar. He also is a contributing author of Limited Liability Partner-ships, Formation, Operation and Taxation (1997).