Wednesday, November 17, 2010

Entity Formation - Limiting Liability in Pennsylvania

By Sean Burke

Entity formation looks much like alphabet soup: LLCs, S Corps, LPs, LLPs… The appropriate entity for a particular business depends on many factors, like capital structure, control, taxes, liability, and flexibility. During a recent meeting I was asked whether, under Pennsylvania law, there were significant differences between the liability protection afforded by LLPs versus LLCs. As is typical with questions posed to lawyers, the answer is a “yes… but” or a “no… unless.” I’ll explain.

First, let's make sure we're using the same terms. An LLC is a limited liability company. It files a certificate of organization with the Department of State. Its owners are called members. So long as the company is properly capitalized and maintained, each member’s liability for the company’s debts is “limited.” That means that each member is only liable for the company’s debts to the extent of his or her investment.

Sean Burke, McQuaide Blasko
An LLP is a limited liability partnership. Under Pennsylvania law, an LLP is a general partnership that has filed an election with the Department of State to have its general partners treated as limited partners for purposes of liability. In other words, for purposes of control/authority, the partners are general partners. But for purposes of liability, the partners are limited partners. This entity is most often used by professionals, e.g. doctors, lawyers, and accountants, who want to be "in control" but don't want to be liable for the malpractice of their partners.

By contrast, an LP is a limited partnership, and it files a certificate of limited partnership with the Department of State. It names at least one general partner. It can have an indefinite number of limited partners. The general partner controls the partnership, and he/she/it is unlimitedly liable for the partnership's debts. The limited partners enjoy limited liability, but have no authority to bind the partnership. Often the LP's general partners is an LLC that is owned by the limited partners too. That way even the general partner's liability is limited.

But it's even more complex than that! Because an LP can also file the election with the Department of State to have its general partners treated as limited partners for purposes of liability. This is known as a limited liability limited partnership, or an LLLP.

But getting back to the initial question: So long as a general partnership makes the appropriate election with the Department of State and continues to file the annual registration thereof, then it will be an LLP and will enjoy the same liability and asset protection as an LLC.

As I mentioned earlier, liability is only one of the factors to consider in selecting an entity for your business. Because in the end the liability protections among the entities are similar, it is often the other factors, e.g. taxes, capital structure, and flexibility, that will most-often tip the scales in favor of one entity or another. You should consult your planner or advisor before forming an entity, because this isn’t legal advice. Don’t rely on it, as it’s intended for informational purposes only.

Sean Burke practices business and estate planning and administration in the Blair County office of McQuaide Blasko. He can be reached at (814) 283-2000 or