California has adopted legislation permitting California attorneys and accountants to practice as limited liability partnerships. This legislation, effective October 10, 1995, has been relatively unheralded. Yet, it provides important benefits to accountants and attorneys.
Limited liability partnerships are domestic general partnerships that elect limited liability status by following procedures described below. Importantly, creating a limited liability partnership may not entail the creation of a new entity as would be the case upon conversion to a limited liability company. Thus the effort and the tax risks associated with entity creation or conversion are reduced.
The liability shield for partners is as complete as the law can make it. Partners are not individually chargeable with any of the debts of the partnership, whether stemming from professional malpractice or contractual claims. They are not liable to the partnership nor other partners for contribution. Rather, they are only liable to third parties for their own tortious conduct.
To attain limited liability partnership status, a general partnership must be composed solely of those licensed to practice public accountancy or law and must:
(a) Register with California’s Secretary of State, after so electing by a vote of the partners.
(b) Register with the State Bar Office of Certification in the case of a law partnership or the State Board of Accountancy in the case of any accountancy partnership.
(c) Provide minimum security for claims. In most cases this will be malpractice insurance in the amount of one hundred thousand dollars ($100,000.00) per licensed person (whether partner or employee) with a maximum of five million dollars ($5,000,000) of coverage for accountants or seven million five hundred thousand dollars ($7,500,000.00) for attorneys. There are other ways to provide the required security.
Because this is a relatively new law and because it was enacted without the usual legislative effort, it contains some areas of ambiguity. Nevertheless, it probably represents the entity of choice for the practice of law and accountancy, much as limited liability companies represent the entity of choice for other endeavors. You and your clients may wish to consider conversion to a limited liability partnership.