LLC's Vs LLP's
I. Until 1992 accountants could practice only as sole proprietors or in general
partnerships or in professional corporations. In January 1992, the AICPA
membership overwhelmingly approve an amendment to Rule 505, Form of
Organization and Name, of its Code of Professional Conduct’s Rules of Practice
to permit the practice of accountancy in any form permitted by state law or
regulation, including the then-emerging LLCs and LLPs.
A. LLC statutes generally protect owners from personal liability for the
ordinary business debts of the entity, though there are exceptions.
B. Like a sole practitioner or general partner, each member of an LLC is
liable for his or her own acts of negligence and/or civil and criminal
C. In exceptional cases courts may hold an individual LLC owner personally
liable for LLC debts by piercing the so-called “corporate veil” of limited
liability. This may occur when an owner has used the LLC to commit a
fraud, has not properly capitalized the LLC or has misled third parties into
believing the practice is being conducted by individuals rather than by the
LLC. The law is just beginning to develop in this area.
A. LLPs: Partial Shield vs. Full Shield
Partner liability for own negligence and malpractice. Full liability
Partner liability for negligence and malpractice in which No
they are not involved. liability
Partner liability for contracts and normal business debts. Full liability
B. Full shield states-a partner is generally liable for his or her own
malpractice and misconduct but not for malpractice committed by other
members of the LLP when he or she is not involved. Partners are not liable
for other types of liabilities, including ordinary business debts of the
C. A partner usually is liable for his or her own malpractice and misconduct
but not for that committed by other members of the LLP when he or she is
not involved. However, in general, partners are liable for the ordinary
business debts of the partnership.
ABC Limited Liability Partnership (LLP) is a CPA firm with three partners: A, B and C.
Partner A is found guilty of malpractice in which partners B and C are not involved. ABC
LLP is liable for a malpractice claim of $10 million. The firm has assets and insurance
coverage totaling $6 million. Soon after the malpractice judgment, the partnership ceases
operations, owing $250,000 to its leaseholder.
Full-shield results: The plaintiff in the malpractice judgment can sue and seek damages
from partnership assets and the personal assets of partner A; partners B and C are not
personally liable. Since a full shield eliminates personal liability of the partners for
contractual obligations and normal business debts, the lessor may seek damages only
from partnership assets but not from the personal assets of partners A, B and C.
Partial-shield results: The plaintiff in the malpractice judgment can sue and seek
damages from partnership assets and the personal assets of partner A. Since partners B
and C were not involved, they are not personally liable. But because a partial shield does
not eliminate personal liability for contractual obligations and normal business debts, all
three partners are potentially personally liable for the $250,000 owed to the leaseholder.
Source: "Limit Practice Liability,'' by Sandra Miller and James J. Tucker, Journal of
Accountancy, Sept. 2005. pp. 71-74.