LLP Liability in Virginia: Making Sure You’re Protected

March 9, 2011
Virginia Lawyers Weekly

Virginia law is not kind to general partnerships. Indeed, general partners can be personally liable for any partnership obligation, and worse yet, for any obligation of an individual partner for actions while acting as a general partner. On the other hand, Virginia law offers broad protection to partnerships that have followed the statutory requirements for and registered as a limited liability partnership.

Few law firms, however, take full advantage of the protections available to them and many fail to organize their partnerships to best protect the partnership’s and their individual partner’s assets and management. Unfortunately, by the time a problem arises, it may be too late to take corrective action.

By taking a few simple steps in advance, however, law firms in Virginia can maximize the benefits of a limited liability partnership, many of which are often overlooked in drafting limited liability partnership agreements and implementing partnership guidelines. Here are five steps that every law firm should take in order to protect its partnership and more importantly, its partners, in advance of any challenges that may arise.

Define your partnership as an LLP and make sure your LLP election is clear and unambiguous

Limited liability partnerships offer much more protection to partners than other partnership structures and are increasingly a more common partnership than the general partnership often seen in years past. The most frequent mistake made by law firms seeking the greater protection of the LLP, however, is to simply change the firm name without changing the actual partnership structure itself.

Basically, in recent years many law firm partnerships that were general partnerships have attempted to convert to limited liability partnerships. However, the partnerships often merely file the appropriate paperwork with the State Corporation Commission of Virginia but do not draft and execute a new agreement. The result is the worst of both worlds. Failing to execute a new agreement that unambiguously elects a limited liability partnership is risky. Such failure leaves the partners unprotected because the ineffective language from their original general partnership agreement does not protect them in the event of a future claim and further undermines the rights and protections afforded by the Virginia limited liability statutes. Therefore, it is important that the partners execute a new agreement specific to a limited liability partnership when they intend to make such a change.

This approach, as opposed to merely amending the existing partnership agreement, ensures that the agreement is more aligned with the protections afforded under the limited liability statutes.

• Execute a Written Partnership Agreement That Complies with Virginia Statutes

Some partnerships intend to have a written limited liability partnership agreement, but never actually draft and execute one. In the absence of a written limited liability partnership agreement, Virginia law may presume either a general partnership agreement or may apply the stricter limitations on partnerships found in Virginia statute. Obviously, the risks of this approach are high.

Virginia statutes give limited liability partnerships protection by specifically defining the obligations and debts of partners. While the advantages are great, so is the need to strictly comply with the statutes creating these advantages. To that end, it is important that a limited liability partnership identify the goals important to its own self-management and ensure that the partnership agreement does not contradict any aspect of Virginia’s limited liability statutes.

If a limited liability partnership agreement contradicts any aspect of Virginia statute, the partnership will be bound by its agreement, even where the statutes offer greater protection or are more favorable to the partnership’s position than its own agreement. Indeed, although a partnership agreement cannot, for example, eliminate the partnership’s obligation of good faith and fair dealing, Virginia courts will first look to the partnership agreement for guidance in analyzing issues that impact the liability of partnerships and the individual partners.

• Make Sure that the Individual Assets Belonging to Each Partner are Protected

Pursuant to Va. Code § 50-73.96(C), "A person is not, solely by reason of being a partner, liable, directly or indirectly, including by way of indemnification, contribution, assessment or otherwise, for debts, obligations or liabilities of, or chargeable to, the partnership, whether sounding in tort, contract or otherwise, that are incurred, created or assumed by the partnership while the partnership is a registered limited liability partnership." As such, Virginia law protects the assets of individual partners to an LLP, but does not protect the assets of individual partners to a general partnership. It is important, therefore, that there is no contrary language in the partnership’s organizing documents and partnership agreement that would expose the assets of individual partners. The best approach for a law partnership to adopt is actually to include this statutory language in its limited liability partnership agreement.

• Identify What Happens When a Partner Leaves the Firm

Partnerships often overlook the issue of what happens when a partner leaves and terminates her or his interest in the partnership. Every partnership should identify what relationship a former partner will have with the remainder of the partnership, specifically relating to debts and obligations. Limited liability partnership agreements should address whether a partner who terminates her or his involvement will continue to be liable to the remaining partners (or retired partners or the estates of deceased partners) for partnership liabilities.

Silence is not golden when it comes to these issues, as Virginia law allows the introduction of parol evidence in order to clarify ambiguous terms. Regardless of what the agreement is, always reduce it to a written provision in a limited liability partnership agreement. If the agreement does not address what happens when a partner leaves the firm, courts will turn to evidence outside the agreement, including testimony from individual partners. In addition, depending on the goals of the partnership, the agreement may specify whether a departing partner must indemnify and hold harmless all other partners in connection with their intentional conduct. The best agreements precisely line up the partnership agreement with their insurance so that no partner is ever liable for the uninsured conduct of another partner.

• Periodically Re-Review the Limited Liability Partnership Agreement

Far too often, partnerships draft and execute a partnership agreement and allow it to gather dust over the years. It is important for any meaningful review of the limited liability partnership agreement to include a review in its entirety to make sure that the partnership’s goals and desired protections are covered by the agreement. In addition to the limited liability partnership statute, the courts recognize a partners’ right to be bound by their contract with each other. More importantly, courts recognize the collective right of third parties, basically everyone else, to be bound as well.

Review of the limited liability partnership agreement should contemplate a holistic approach with an eye toward complete partner protection. The combination of the limited liability partnership agreement and the partnership’s insurance program should permit individual partners to sleep better at night.