Law in the Marketplace: Down with partnerships

For the Monitor
Published: 7/3/2021 9:17:45 AM

While there are no available statistics, there are probably at least several hundred general partnerships currently doing business in New Hampshire. Indeed, there may even be a few thousand of them, including, perhaps, more than a few general partnerships owned and operated by readers of this column.

If you are one of these readers, I have some advice for you (subject, of course, to any advice your own lawyer may provide): Stop using a general partnership to conduct your business!

The reason for my advice is that, because they are a very old form of business entity, general partnerships do not provide a liability shield that will protect your personal assets from claims by third parties against your business. This means that if these third parties succeed in their claim and your business insurance doesn’t cover them, you could lose everything you own – e.g., your stocks, any valuable jewelry or furnishings you may own, and even, with certain limitations, your home. And in our current hyper- litigious society, you can never be sure you won’t be the target of such a claim.

What should you do to obtain a liability shield for your business and thus to prevent the above potential losses? You have two basic choices:

■You can register your general partnership with the New Hampshire Secretary of State as a limited liability general partnership – generally referred to as an LLP.

■You can create a new LLC and merge your general partnership into your LLC.

What are the pros and cons for you of these two options?

■Registering your general partnership as an LLP is a quick, easy, and inexpensive process. You probably won’t need the help of a lawyer, and you can register online at quickstart.sos.nh.gov/online, and the Secretary of State fee will only be $100. This registration will provide you with a solid statutory liability shield and also, to a substantial degree, with the special type of statutory business asset protections called charging order protections and the legal and tax flexibility that New Hampshire LLC provide.

■However, in other states, your LLP liability shield may not be as strong as a New Hampshire LLC liability shield, and in some states, it may not even exist. In addition, even though LLCs have only been available to U.S business owners since 1993, there is already a vastly greater body of LLC case law that the case law applicable to LLPs. And of course, third parties you deal with in your business are likely to be very familiar with LLCs but not with LLPs.

■As for merging your LLP into a newly formed LLC: This process will be significantly complex than registering your general partnership as an LLP, and it will cost you, at a minimum, several hundred dollars in legal fees. And, as indicated, third parties that you deal with in your business may feel more comfortable doing business with an LLC than with an LLP. Finally, with regard to of charging order protections and other legal factors, LLC statutory law is better that LLP law. And, as noted, LLC case law is vastly more extensive than LLP law.

Here’s the bottom line: If the business assets and business income of your general partnership are modest, you may want to simply register your general partnership as an LLP. But if these assets and this income are substantial, you should consider merging your LLP into a newly formed LLC. But if you do so, you’ll not only have to pay legal fees for the merger itself but also for the drafting of a comprehensive LLC operating agreement. That won’t be cheap either.

(John Cunningham is a Concord, NH lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law, advising clients under IRC section 199A, and estate planning. His telephone number is (603) 856-7172, his e-mail address is lawjmc@comcast.net, and the link to his website is www.llc199A.com.)


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