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LIMITED LIABILITY PARTNERSHIPS

You may have noticed over the past few years that some businesses have added the letters LLP to the end of the company name.  For example, Smith & Jones LLP.  The LLP stands for Limited Liability Partnership.  This is a concept that was incorporated a few years ago into the Partnership Act of Alberta, although the concept had already been used in the United States and Ontario. 

At its most basic, a Partnership is not a separate legal entity, but simply an association of two or more parties for the purpose of carrying on a business for profit.  A Corporation, on the other hand, is a separate legal entity created by statute and is completely distinct from its shareholders.  A corporation is not a partnership, but a corporation can be a partner. 

In a corporation, the shareholders enjoy limited liability for the corporation's obligations.  Normally, only their investment in the corporation is at risk of loss if the corporation does not succeed.  Partners in a partnership do not have this protection and have unlimited liability for the liabilities and obligations of the firm.  These liabilities can include such items as contractual obligations, as well as negligence or malpractice by one of the other partners or an employee.  This puts the personal assets of the partners at risk and can create an uncomfortable situation, especially in a firm of up to 100 people or more.  It is unrealistic to expect that a partner can keep track of and monitor all of the actions of his or her partners, let alone the employees.  It is for this reason that many people form corporations, which not only shield the personal assets of the shareholders from the claims of persons against the company, but also protect directors and managers from most actions.

In some professions (accounting, law, medicine, dentistry, chiropractic, and optometry) the governing body does not permit the profession to be carried on by ordinary corporations.  While these can be carried on by 'professional corporations', the shareholders of a typical professional corporation are accountable for all of the corporation's liabilities.

In Alberta, the Limited Liability Partnership attempts to address these inequities.  Registering as an LLP does not provide the partners of the LLP with full protection from the liabilities of the partnership, such as the ordinary debts of the partnership.  It does, however, protect a partner in an LLP from any negligence, wrongful act or omission, malpractice, or misconduct of another partner or an employee or agent of the partnership that occurs in the ordinary course of carrying on practice in the profession.  This liability protection will be unavailable where the partner was aware of the wrongdoing or where the act was committed by an employee or agent for whom the partner is directly responsible in a supervisory role and the partner failed to provide adequate, competent supervision to a reasonable standard. 

While the new sections of the Partnership Act have the effect of limiting the liability of individual partners for the acts of others within the partnership, the Act also protects those persons who are clients of the LLP by requiring that, prior to registration as a Limited Liability Partnership, the governing body of the profession must certify that the partners are covered by liability insurance that equals or exceeds the existing standards and that all other eligibility requirements for practice as an Alberta LLP have been met.  Therefore, while the lawmakers have to a degree limited the liability of partners on the one hand, they have offset this by mandatory insurance and other requirements on the other. 

The result is a recognition of the ever increasing complexities and realities of operating a partnership, while at the same time addressing the concerns of those who conduct business with the partnership.  For those who are clients of a firm that has become a limited liability partnership, there will be no difference in their business dealings with the firm, other than they will notice that the initials 'LLP' have been added to the firm name.

By Tom Langford
August 17, 2005