UNIVERSITY OF COLORADO LAW REVIEW Vol. 66 ISSUE 4, page 1065 REGISTERED LIMITED LIABILITY PARTNERSHIPS: PRESENT AT THE BIRTH (NEARLY) Robert W. Hamilton* V. The Anomalies Created by the Texas-Type Statute Before turning to the alternative Minnesota form of LLP statute, I consider first some problems and anomalies created by statutes based on the Texas model. A.The Minimum Capital Requirement The Delaware and Texas statutes require that an LLP set aside a minimum amount of funds or their equivalent, or obtain liability insurance for the protection of persons with negligence or malpractice claims against the firm. In Texas, the minimum financial responsibility is $100,000.1 In Delaware, it is $1,000,000.2 This requirement seems anomalous because minimum capital requirements have been virtually eliminated for other forms of limited liability entities. A Texas corporation can be created with minimum capital of $1,000;3 in most states today there is no minimum capital requirement for corporations. In Texas, as in other states, there is no minimum capital requirement for a limited liability company. It seems odd, to say the least, that an entity providing a complete shield against personal liability can be created with only nominal capital (or with zero capital) while an LLP which provides only a partial shield must maintain a significant capital base. This requirement, however, reflects the force of the political sentiment in Texas that limiting traditional general partnership liability was a radical change taking away something of importance to tort claimants. The amount of $100,000 is obviously not adequate to guarantee recovery in most malpractice claims filed against a major law or accounting firm with hundreds of partners. The $100,000 figure was chosen as a compromise so that smaller partnerships could use the LLP form without difficulty. On the other hand, law and accounting firms are likely to have substantial amounts of malpractice insurance_as much as $20,000,000 or $30,000,000 in the case of the very large law firms and hundreds of millions of dollars in the case of major accounting firms_so that this requirement is in fact irrelevant for most professional firms. For most firms, the same thing is true of the $1,000,000 Delaware requirement. 1.An Incomplete Shield The Texas LLP statute is concerned with only one avenue by which a partner may be held liable for a partnership malpractice obligation. That avenue is the worst-case Dallas Law Firm scenario where a substantial malpractice judgment is entered against a partnership and its individual partners, and the firm is unable to fully satisfy the judgment from its liability insurance and partnership assets. Each partner is then jointly and severally liable on the unsatisfied portion of the judgment and may be sued on this liability; the personal assets of each partner may then be levied upon to satisfy this judgment. Indeed, one newspaper story written at the time the major accounting firms became LLPs stated that the LLP device provides only a limited type of insurance, which might be described as "death insurance" for the innocent partners because it comes into play to protect partners' personal wealth only upon the collapse of a firm when it is unable to satisfy a malpractice claim.4 This original statutory coverage is incomplete. Partners may be held liable for malpractice and similar claims under other scenarios as well. If the partnership itself satisfies a malpractice liability out of its own assets, the payment will be reflected as reductions of the capital accounts of all the individual partners. Negative capital accounts for some or all of the partners are likely to result. Individual partners may be compelled by the partnership or the other partners to make contributions to the partnership restoring capital accounts to at least zero, to permit satisfaction of all liabilities upon winding up. Such contributions, if required of innocent partners, are directly traceable to the malpractice or negligence claim, but the payments are technically "contributions" to the "partnership," not a payment to the holder of a malpractice or negligence claim. Thus, they may not be covered by the LLP statute since the payments are not made to satisfy the malpractice claim itself.5 A similar possibility is that an individual partner, who is personally liable for a malpractice or negligence claim, may satisfy the liability out of his personal assets and then seek indemnification from the partnership and the other partners, as the Uniform Partnership Act contemplates.6 Again, essentially the same argument may be made that the obligation to indemnify the partner arises from the partnership relation and is not liability arising from the malpractice or negligence itself. As these possibilities became clear, the original LLP statutes were amended to extend the shield of limited liability to indirect responsibility by contribution or indemnification for negligence or malpractice claims. In 1994, for example, section 1515 of the Delaware statute was amended to provide that innocent partners were not liable "either directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for debts, obligations and liabilities of or chargeable to the partnership."7 Yet another problem shortly appeared. Malpractice is in the gray area between tort and contract. In Texas, it is customary to plead malpractice as a tort because, I assume, one may be entitled to exemplary damages and attorneys' fees. However, it is possible in Texas and elsewhere for a client of a law firm to phrase her malpractice claim as a breach of an implied warranty that is part of her contract with the law firm. If a client frames her pleading as a contract claim, does that mean that all partners, innocent and not so innocent, are personally responsible? If so, the shield of limited liability may easily be avoided by artful pleading. In 1994, the Delaware LLP statute was amended by adding the phrase "whether characterized as tort, contract or otherwise."8 2. More on An Incomplete Shield: Opportunistic Conduct in the Use of Partnership Funds Unfortunately, the problems of an incomplete shield are not fully solved by the revisions described in the previous sections. The LLP involves a confluence of interrelated legal principles that seems inevitably to lead to a considerable amount of jockeying and opportunistic conduct when an LLP is faced with a major malpractice claim as well as ordinary business liabili ties that exceed, or may exceed, the available partnership assets and liability insurance. The following discussion is based entirely on armchair analysis since, so far as I know, no LLP has actually been faced with these types of problems. It is helpful to first summarize the various principles applicable in this situation: (1) The LLP itself is liable for both the ordinary business obligations and the malpractice claim. (2) Innocent partners are personally liable only for the ordinary business obligations and they may be compelled to contribute to the LLP to permit it to discharge those obligations. (3) Innocent partners are not liable for the malpractice claim and cannot be compelled to contribute to the LLP to permit it to discharge that obligation. (4) The guilty partners are personally liable for both the malpractice claim and the ordinary business obligations and may be compelled to contrib ute to the LLP to permit it to discharge both types of obligations. The interaction of these principles will inevitably lead to serious conflicts in interest among the partners and to opportu nistic conduct as the two groups of partners seek to minimize their personal exposure to liability. The complicating factor is that all assets of the LLP may be used in an undifferentiated way to satisfy either general trade liabilities or the malpractice liabilities, or both, but the innocent partners may be compelled to contribute only to the satisfaction of the ordinary business obligations. Thus, the way the LLP's assets are used to satisfy its liabilities will inevitably affect the relative wealth of the innocent and guilty parties.9 I use a law firm facing a significant malpractice claim that threatens to exceed the LLP's assets as an example of how these conflicts arise. Consider first the incentives of the guilty partners. They will obviously desire that the partnership expend the LLP's assets while they are held by the LLP to satisfy the malpractice claim. This may increase the amount of the ordinary business obligations left unpaid when the LLP's assets are exhausted, but the innocent partners will have to contribute to satisfy these obligations since the shield of limited liability does not protect them against such obligations.10 Thus, to the extent the LLP's assets are used to satisfy the malpractice claim, the wealth of the innocent partners is reduced. The innocent partners, however, have a quite different incentive. First of all, they would prefer to use available assets to satisfy or minimize the LLP's obligations other than the malpractice claim. The innocent partners, for example, would be delighted to use the LLP's assets to prepay rental obligations on a lease rather than to use the assets to settle the malpractice claim. Then, if there is a deficiency toward which partners must contribute, it would predominantly be based on the malpractice claim for which the innocent partners have no responsibility. Thus, the use of partnership assets to satisfy ordinary business obligations increases the liabilities imposed on the guilty partners and reduces the liabilities imposed on the innocent partners. The innocent partners also would prefer that distributions of LLP assets be made to the partners individually rather than being retained by the LLP, since the assets distributed are removed from the LLP and cannot be used thereafter to satisfy any part of the malpractice claim.11 This strategy is attractive to the innocent partners because it prevents the LLP from using the distributed assets to satisfy the malpractice claim, and the malpractice creditor may not recover them from the innocent partners if the remaining assets prove insufficient to satisfy the malpractice claim.12 Indeed, whenever an LLP has assets that are clearly insufficient to satisfy both malpractice and ordinary business claims and is in the process of winding up, direct conflicts of interest are created. There appears to be no rational way to resolve these conflicts. The innocent partners may argue that all available assets should be first applied to general trade liabilities on the theory that those payments benefit all partners in the LLP. The partners with malpractice exposure may argue that a pro rata application of the LLP's assets across all liabilities is fairest.13 Judicial intervention to ensure an even-handed use of LLP assets in these situations would seem probable, but it is not at all clear just what "even- handed" means in this situation. One basic feature of LLPs based on the Texas model is that innocent partners suffer losses (either a reduction in the amounts otherwise available to be distributed to them or an increase in the amount they must contribute to satisfy ordinary business obligations) to the extent that the LLP uses its assets to pay down the malpractice claim before all ordinary business obligations have been satisfied. For this reason, LLPs based on the Texas model have a strong incentive to obtain liability insurance in amounts sufficient to cover all malpractice claims, if that is possible. 3.Problems of Interpretation as to the Scope of the Shield of Limited Liability The shield of limited liability is easy to describe in abstract terms. But serious issues of interpretation arise at the margin. Under the Texas statute, joint and several liability for acts of negligence or malpractice continues to exist for (1) the partners actually committing the negligence or malpractice,14 (2) other partners who had "direct supervision and control" over the partners who were negligent or committed malpractice,15 and (3) partners who supervised employees who committed the acts of negligence or malpractice.16 In addition, Texas adds (4) partners who were aware of the negligence or malpractice and failed to take reasonable steps to prevent its occurrence.17 What does "direct supervision and control" mean? How close does supervision have to be to constitute "direct" supervision? Does it cover the ultimate responsibility that a senior partner or rainmaker in a law firm has for "his" client? Is it limited to the mid- level partner who actually does the work or who supervises associates and more junior partners when they do the work? Does it extend to members of the opinion committee of a law firm who review all formal legal opinions before they are released? Very similar issues also arise in accounting firms. Typically financial audits are performed by employees of an accounting firm subject to the general oversight of the "responsible" partner who actually signs the audit letter. The "responsible" partner may be indirectly involved in a dozen or more audits at the same time. Does he have "direct" supervision? I would assume so, even though as a practical matter there is no way he could directly supervise all the people involved in "his" audits. On the other hand, the chairperson of a practice area in an accounting or law firm who sets general policy and who may be consulted on difficult questions arising in areas of specialization arguably does not have direct supervision or control over anyone, and should not be responsible for the negligence or malpractice of persons actually working on the question. These are presumably fact- specific questions on which there is no statutory guidance. The scope of malpractice or negligence that is covered by the shield of limited liability also creates difficulty. The scope of acts for which protection is provided to innocent partners is defined in different ways in the state statutes. The Delaware statute, as originally enacted, referred to obligations arising from "negligence, wrongful acts, or misconduct."18 The original Texas statute referred to "errors, omissions, negligence, incompetence, or malfeasance."19 Louisiana added to the Texas statute the words "willful or intentional misconduct."20 Despite these variations in language, it seems reasonably clear that the coverage of all these statutes goes beyond traditional negligence or malpractice claims and covers automobile accidents, fraud claims, thefts, over-billing claims as well as intentional tortious acts such as false imprisonment or assault. However, serious problems of scope nevertheless exist. Another gray area involves claims based on statutory provisions, e.g., claims based on discrimination on the basis of age, sex, or race. If, for example, a partner intentionally discriminates against a person because she is over the age of fifty, can that person hold all the general partners liable? The answer is not clear, but the issue is hardly theoretical.21 Yet another constructional problem is created by the Delaware and Texas provisions that permit financial responsibility to be evidenced in the form of a liability insurance policy "of a kind that is designed to cover the kinds of errors, negligence, wrongful acts, and misconduct for which liability is limited" by the LLP statute.22 If a liability insurance policy excludes from coverage some specific action that is within the shield of limited liability, does that mean the insurance policy is disqualified and the shield of limited liability lost entirely? If not, what happens if an act of negligence or malpractice is covered by the shield of limited liability under the statute but is excluded from coverage by a restriction or exception in the liability insurance policy? Since the insurance proceeds are not available to the plaintiff in that case, may she ignore the shield of limited liability and go after the innocent partners? The language "of a kind that is designed to cover the kinds of negligence, wrongful acts, and misconduct for which liability is limited" indicates that a complete overlap between coverage and the shield of limited liability is not required, but no one really knows. 4.Possible Impact of the LLP on Allocation of Financial Interests and Liability Insurance As one reflects on the peculiar consequences of creating two classes of partners for liability purposes depending on the nature of the claim asserted, it seems possible that the LLP may affect allocations of partnership interests and partnership decisions in unpredictable ways. For simplicity, consider a two-person firm with each partner having quite different practices with different risks. Partner A works in corporate mergers and acquisitions, a highly remunerative practice that is both cyclical and carries a high risk of liability. Partner B has a trusts and estates practice that is considerably less risky and more stable, but also less remunerative. In a traditional partnership, there is a kind of synergy, with partner B's stable practice compensating for A's cyclical one in bad years, and with B assuming part of the risk of liability arising out of A's practice. B should obviously expect to be compensated for these contributions to the partnership by receiving a portion of the excess income generated by A. The allocation of partnership interests is, of course, a matter of negotiation. Let us assume that a 50-50 division of profit and loss is negotiated even though A's practice produces seventy percent of the revenues on the average. Once the AB firm becomes an LLP, however, the allocation should shift. B is no longer assuming the risk of liability for A's practice; A has 100% of that risk. Instead of a 50-50 sharing of profits and losses, there is now a 50-50 sharing of profits and a 0-100% sharing of the principal malpractice risks in the firm. A should insist that his percentage interest in the firm be increased. And, it is quite possible that A might conclude that if he must bear all the risk of his practice, there is little reason to share a portion of his income from that practice with B, and that he should "go it alone."23 Assuming that A and B decide to remain in partnership as an LLP, on say a 60-40 sharing ratio, will the AB firm purchase less malpractice insurance than it did before? One might expect that it would reduce its insurance coverage by the amount of B's outside wealth. However, I doubt this would be so. I have previously mentioned that the peculiar LLP liability structure continues, to some extent, to make B's investment in the firm subject to reduction indirectly by A's malpractice liabilities. But more basically, there is always a possibility that B will commit malpractice in his trusts and estates practice with uncertain consequences and damages. Hence, it seems likely that the amount of malpractice insurance purchased will not be affected by the decision to become an LLP. 5. Effect on Settlement of Malpractice Claims The LLP election also apparently changes dramatically the willingness of firms to settle negligence or malpractice claims. Several professional firms have settled negligence or malpractice claims arising out of the collapse of banks or thrifts by negotiating a global settlement, payable in part immediately from malpractice insurance and the balance payable by the partnership over a period of several years presumably to permit the payments to be made from future cash flow.24 These settlements have been negotiated by both law and accounting firms with the FDIC and RTC. It is unlikely that the innocent partners of an LLP would ever agree to such a proposal at least in the form such proposals have taken in the past. If the innocent partners are not liable for the malpractice claim at all, why should they accept a settlement that in effect directs a portion of future earnings to satisfy that claim? Presumably, the subsequent payments with respect to the malpractice liability will be charged directly against the capital accounts of the guilty partners in their entirety. However, that does not provide complete protection either, since, for the reasons described earlier, LLP funds used to pay malpractice liabilities inevitably increase the future risk to innocent partners that the LLP will be unable to satisfy all of its normal business obligations in the event of liquidation.25 Rather than accept a workout type of settlement, it would be more sensible for the innocent partners to leave the firm entirely and join another, since remaining in the firm unnecessarily exposes their future earnings to direct or indirect satisfaction of the malpractice liability for which they are not directly liable. Alternatively, the innocent partners might withdraw from the firm and form a new partnership composed entirely of innocent partners. There would then be no claim against the future income of that firm, and the entire malpractice liability would rest with the old firm to be satisfied by that firm from malpractice insurance and by requiring contributions from the guilty partners. Any innocent partners not invited to join this new firm should certainly sever their relationship with the old firm. On balance, is the LLP, as created by Texas and Delaware, a good idea? Back in 1991 I was very skeptical of the initial idea but eventually agreed that the proposal made sense, given the extreme stress on the legal and accounting professions caused by the efforts of the RTC and FDIC to hold them liable for losses incurred by financial institutions during the 1980s. A conversation with a couple of young partners in the Dallas Law Firm (who were former students) persuaded me that something needed to be done to protect the innocent partner whose only mistake was to join a leading, and apparently highly reputable, law firm. It is true that the LLP creates some potentially troublesome anomalies and potential problems for the partnership form of business. However, these do not appear to be an insuperable objection. For one thing, these problems are unlikely to arise regularly.26 The great beauty of the Texas and Delaware statutes (in contrast to the Minnesota and New York statutes discussed subsequently) is that they provide "peace of mind" assurance without changing the basic partnership rules, except in the case of firms actually facing substantial malpractice claims in excess of their malpractice insurance.27 Of all the millions or billions of partnership transactions that occur each year in the United States, the limited liability feature of the Texas and Delaware statutes will be irrelevant in the overwhelming bulk of them, since very few partnerships in fact ever face malpractice claims of this magnitude. VI. The Alternative Conception: The Minnesota and New York Statutes Within the last year a major alternative to the Texas/Delaware version of the LLP has been developed. This alternative is best exemplified by the Minnesota statute enacted in 1994.28 This statute proceeds on quite a different theory than the Texas and Delaware statutes. The shield of limited liability provided by the Minnesota statute covers all contract and tort claims that might arise, except that the partnership may compel contributions by partners involved in transactions that constitute breaches of any duty the partner owes to the partnership. This version of the LLP essentially eliminates all personal liability of partners for partnership obligations to the same extent that liability is eliminated under the limited liability company statute. If the change made by the Texas statute is viewed as an "important" qualification to the general conception of partnership law, the change made by the Minnesota statute may be fairly described as "revolutionary." It basically inserts the word "not" in old section 15 of the Uniform Partnership Act with respect to all LLPs: All partners are [not] liable (a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14. (b) Jointly for all other debts and obligations of the partnership; . . . .29 The liability provisions of the Minnesota statute may be summarized as follows: 1. Partners in an LLP are not "merely on account of this status, personally liable for anything chargeable to the partnership . . . or for any other debts or obligations" of the LLP if the "charge, debt, or obligation arose or accrued" while the LLP was qualified as such.30 2. A partner, however, is liable "to the partnership or its partners" if the particular partner has "breached a duty to the partnership or to the other partners" and this liability may be in the form of direct liability to the partners or contribution to the partnership.31 3. The case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability partnerships.32 4. A partner who receives a distribution from an LLP "that would have been in violation of section 302A.551 had the limited liability partnership been a corporation with a board of directors is liable to the limited liability partnership, its receiver, or other person winding up its affairs, but only to the extent that the distribution received by the partner exceeded the amount that properly could have been paid under section 302A.551."33 The section of the corporation statutes referred to creates an equity insolvency test, allowing a distribution only if "the corporation will be able to pay its debts in the ordinary course of business after making the distribution."34 The shield of limited liability described in point 1 is limited by the phrase "merely on account of this status," i.e. the status of being a partner in an LLP.35 A partner may be liable as a direct tortfeasor (e.g., by committing an act of malpractice), or by his own action (e.g., by guaranteeing a partnership obligation). A.The Justification for a Shield against All Liability The first question to be addressed is why should the shield of limited liability be expanded in the way it has been in these two statutes to cover essentially all partnership obligations.36 I see two possible justifications, neither of which withstands analysis. (a) The first argument is that extension of the shield to cover all liabilities is necessary because the shield provided by the Texas type statute is not fully bullet proof, especially in the situation where a partnership is facing both ordinary business liabilities and malpractice claims that, in combination, exceed the available insurance and the available assets of the partnership. As described earlier,37 it is true that in this situation innocent partners may be compelled to pay or contribute toward ordinary business liabilities that otherwise would have been satisfied out of partnership assets if there had been no malpractice claim. My problem with this argument is that the proposed solution is so much broader than the problem being addressed that it is difficult to avoid a charge of gross overreaching by members of the legal profession. Even if one assumes the underlying premise that innocent partners should be protected against the possibility that the firm will use partnership assets first to pay malpractice claims,38 this problem could easily be handled by the establishment of special priority rules when a partnership is faced with both ordinary business and malpractice liabilities. The solution of the Minnesota statute is to immunize all partners from liability for all obligations of the LLP even when no malpractice liability is involved and the sole claims are contractual in nature. The proposed solution is so much vaster than the problem that is being addressed that the suggestion itself is staggering. Consider law firms, for example. What percentage of law firms collapse leaving a mix of unsatisfied malpractice claims and ordinary business liabilities after exhaustion of partnership assets and liability insurance? Five percent? Certainly much less than that. Most law firms collapse because (1) they are not able to attract sufficient business to meet their overhead and justify their continued existence, (2) they previously entered into disastrous leases, (3) there are irresolvable personal disagreements among the partners, or (4) rain makers decide they can do better either by setting up their own firm or by joining another firm. Yet the Minnesota statute gives all partners, in every collapsed partnership, protection from disastrous leases, from the consequences of hiring too many support personnel or adopting an ineffective business plan, or from relying upon a hoped-for rainmaker who in fact did not make very much rain. I find this result insupportable both as a matter of theory and as simple common sense. The argument that this broadening of limited liability is necessary to make the shield of limited liability against malpractice claims "more perfect" seems to me to be a pretext for quietly obtaining limited liability for all partners in general partnerships without telling the world about it. (b) The second argument is the normative one that limited liability is the preferred policy for business entities generally and therefore the Minnesota statute "gets it right." Limited liability is preferable, it is argued, because it encourages passive investments in firms and protects inadvertent or unwary partners from unexpected and crushing liabilities. Major lenders always may obtain personal liability by contract. A variation of this argument is that it is not very important whichever rule is adopted with respect to contract claims because parties may negotiate, either for nonrecourse liability in the case of an unlimited liability rule, or for personal guarantees by owners in the case of a limited liability rule. In either event, the Minnesota statute is viewed as a desirable improvement over the Texas and Delaware versions of LLP statutes. The position that limited liability is the preferred rule has been most eloquently set forth by law and economics scholars exemplified by Professor Larry Ribstein.39 In the view of these scholars, the current debate about LLP statutes really has matters backwards: limited liability with respect to contract claims is desirable, and the serious question should be whether or not limited liability should be extended to tort cases as well.40 If the original conception of the Texas LLP statute as "peace of mind insurance" is accepted, in this view the extension of the shield of limited liability to general business obligations is clearly desirable. I simply do not agree that the desirable default rule for general partnerships in contract matters is limited liability or that partnership default rules are unimportant in the real world. The law and economics scholarship is based on the assumption that the world consists of persons who act rationally, with full information, and with alternative choices. The real world doubtless has many such people and these people will adjust their behavior to either default rule without difficulty. For example, the practice has developed in some contracts with law and accounting partnerships of providing limited liability for innocent partners by agreement.41 There is also a practice among sophisticated creditors of partnerships_particularly commercial lenders and banks_of demanding personal guarantees from individual partners (despite the default rule of personal liability) to avoid procedural obstacles to a direct suit against the partner in question to recover on partnership obligations. Persons with sufficient sophistication to demand guarantees of this type obviously do not rely on default rules. And there may be many others persons of sufficient sophistication to adjust their behavior to this new default rule without difficulty. My basic concern is that the real world contains a tremendous number of people who lack basic sophistication. There are about one and a half million partnerships in the United States; most of them are very small and involve primarily relatively unsophisticated people. Consider, for example, a small law firm. Its principal contracts will be with its clients, including persons charged with crimes, those pursuing workmen's compensation claims, injury claims, tort claims, social security eligibility claims, employment discrimination claims, and on and on. Its principal creditors will be the local bank, which is presumably a sophisticated creditor, a landlord, suppliers of goods, secretarial employees and paralegals, perhaps an associate or two, local firms supplying computer equipment and supplies, and so forth. Most of the one and a half million partnerships are like this; they are farm partnerships, small service businesses, small retailers, and the like. Indeed, when one thinks about the population of persons who contract with partnerships, the number of unsophisticated people far, far exceeds the number of sophisticated ones. And, it is this population of persons who contract with partnerships that is adversely affected as a group by the quiet reversal of the default rule of liability in the Minnesota statute. There is a wide gulf, in short, between the theoretical model used by law and economics scholars in which all persons are sophisticated and the real world in which we live where most individuals may not even know what a default rule is, much less that it might be in their interest to seek to negotiate a special deal to change it in the unlikely event that something unexpected happens. The great bulk of society relies, without realizing it, on whatever default rule the legal system provides.42 The Minnesota statute changes a basic default rule of personal liability for partnership law that has existed for centuries. How many people are dimly aware that when they deal with a partnership that the personal credit of each partner stands behind the firm? A great many, I suspect. How many will understand that the little letters "L.L.P." on the door means that the rule of personal liability has been changed for that partnership? Not very many, I suspect.43 It is of course true that most partnerships today may incorporate and obtain limited liability. Today, a partnership may also reform itself as an LLC and obtain limited liability. It is simply not necessary to change the default rule for general partnerships since persons desiring limited liability may use these alternative business forms. Indeed, the creation of an LLP that is essentially indistinguishable from an LLC is almost certain to generate increased confusion. Whether or not people will be misled by these differently named limited liability entities I do not know. However, I am sure that if the default rule for general partnerships is quietly changed, a lot of relatively unsophisticated people will discover to their sorrow that they did not have a lot of people "on the hook" that they thought they had when they dealt with a specific general partnership. B.Gaps In the Shield of Limited Liability The stated purpose of the Minnesota and New York statutes is to avoid the gaps in the shield of limited liability that may exist under the Texas and Delaware type statutes. Gaps nevertheless exist in new and different areas under these new statutes, and the Minnesota statute does not avoid the problems of conflict and opportunistic conduct that appear in Texas and Delaware LLPs. Since these statutes provide a limited liability shield for both contract and tort claims, it is sometimes necessary to consider not only traditional malpractice claims but also contract claims (e.g., the execution of a long term lease on office space in an area in which real estate values have declined substantially). 1. Conflicts and Opportunistic Conduct The Minnesota statute does not avoid all problems of conflict and opportunistic conduct; these problems are quite similar to those discussed in connection with the Texas and Delaware LLPs.44 In a Minnesota LLP, conflicts between classes of partners will occur whenever one or more partners are personally liable for contributions to the LLP (because they were guilty of malpractice or negligence) and the LLP's assets and liability insurance are, or may be, insufficient to cover both the ordinary business obligations and the tort liabilities of the LLP. Conflict may also arise in the absence of malpractice claims where partnership assets are inadequate to cover all ordinary business liabilities and one or more partners (but not all of them) have personal responsibility for specific contract claims through personal guarantees. These conflicts have a different twist than the conflicts arising in the Texas and Delaware LLPs. Innocent partners under the Minnesota statute have no responsibility to contribute toward ordinary business obligations. However, they would certainly prefer that the LLP make distributions rather than retain assets to settle its obligations.45 If distributions are not made, innocent partners are indifferent as to whether the LLP's assets are applied against the ordinary business liabilities or against the malpractice liabilities. However, the partners guilty of malpractice have a strong interest in applying as many assets as possible against the malpractice claims for which they have personal responsibility rather than against the ordinary business obligations for which they do not have personal responsibility. The likely outcome is that the LLP's assets will in fact be used to satisfy the malpractice liabilities and the ordinary business creditors who have small claims or are unsophisticated will get stiffed. 2. Waivers It is not clear whether the shield of limited liability in Minnesota is personal to each partner or whether it may be waived for all partners by a single partner, acting within the scope of his actual or apparent authority, when entering into long term contractual commitments such as a lease. The shield extends to liabilities arising "merely" from partnership status and certainly may be waived.46 If it can be waived only by the individual decision of each partner,47 it will be very difficult if not impossible to obtain waivers from all partners in a large national law or accounting firm_further indication that default rules do matter in the real world. Under ordinary agency principles applicable to partners, however, it would appear likely that the shield of limited liability may be waived by a single partner when in negotiation with a creditor even though that action may exceed his actual authority. If this is true, partners in Minnesota LLPs may readily lose their shield of limited liability without their knowledge or personal consent. In New York, the statute provides specifically that the shield may be waived by a majority vote of the partners, though it is unclear whether a majority is to be determined on a per capita basis or on the basis of weighted financial interests. Presumably, a majority of the partners may waive the shield of limited liability without the prior consent of, or over the specific objection of, the remaining partners. Again, the shield of limited liability for specific partners may disappear without the knowledge or consent of the partners themselves. 3. Piercing the Partnership Veil The Minnesota LLP statute specifically incorporates the Minnesota case law on piercing the corporate veil. This, by itself, creates significant uncertainty that the shield of limited liability will be available in specific situations. I am not intimately familiar with the Minnesota veil piercing cases (except to recognize that Minnesota is the principal home of the infa mous reverse pierce cases),48 but I am familiar with the Texas cases and statutes on this doctrine. The tests in Texas are sufficiently vague and amorphous that litigation is easy to bring and complaints are hard to get dismissed on motions for summary judgment. In Texas, the issue of piercing is a question of fact for the jury and, as a result, a high proportion of piercing cases settle. I assume that the same thing happens in most other states even though the rules may be somewhat different. I am also doubtful that the corporate veil piercing concepts are readily transferred to the LLP context, which builds from the partnership model of procedural informality. For example, one of the tests usually mentioned and relied upon by courts is "failure to follow corporate formalities."49 The LLP does not have formalities by definition. Despite my uncertainty as to whether the amorphous piercing the corporate veil doctrine is the right body of law to look to, I agree that similar concepts must be applied to the Minnesota version of LLPs to prevent irresponsibility and actual fraud.50 4.Tests for Distributions The Minnesota statute also makes applicable to LLPs another corporation concept: the legal capital rules. The Minnesota corporation statute adopts a straight equity insolvency standard for distributions that does not require any mini mum quantity of capital to be retained by the corporation. I agree that some restrictions must be placed on distribution policies of LLPs under the Minnesota statute, and the equity insolvency test, requiring partnerships to make a reasonable estimate of the ability of the firm to meet its obligations as they mature before making a distribution, seems appropriate. I am not personally familiar with distribution policies in major law firms, but it is likely that distribution policies used by law firms prior to their qualification as LLPs will have to be modified under this standard. It is my impression that many firms distribute essentially all their earnings each year, planning to borrow if necessary to maintain the necessary cash flow in the early months of the next fiscal year. In the past it has not been necessary to be very concerned about the distribution policies of law partnerships, since creditors could sue partners on partnership obligations. Upon the LLP election, however, distributions, once made, are presumptively not recoverable by partnership creditors, and the equity insolvency test must be addressed before every distribution. It may be difficult for a firm to meet this test if a major malpractice claim has been made against the firm and is unresolved. Indeed, under the equity insolvency test it may be difficult in this situation to justify any distribution to the partners, even routine monthly draws. Further, not all states have modern legal capital statutes such as Minnesota's. Many have older statutes that require stated capital and capital surplus accounts that are not available for distribution to shareholders at all or are distributable only upon a vote of certain classes of shareholders. In these states, a special rule for when distributions by LLPs are permitted may have to be developed.51 5. When Do Obligations, Charges, Debts, or Liabilities Arise? LLP statutes provide for protection against liabilities or obligations only if they arise during the period an LLP registra tion is in effect. In this respect the shield of limited liability for partners in LLPs differs from the protection accorded investors in limited liability companies or shareholders in corporations. The precise language in the Minnesota statute, for example, is that the "charge, debt, or obligation arose or accrued" while a registration was in effect.52 The Texas statute uses different language. It refers to "debts and obligations . . . arising from errors, omissions, negligence, incompetence, or malfeasance committed while" the partnership was registered.53 These phrases mask considerable uncertainty when applied to both contractual and tort claims. For example, consider a ten year lease of office space. Did the entire rental obligation "arise or accrue" when the lease was signed, or does the obligation "arise" and "accrue" each month during the lease term, or does the obligation arise on the due date of each rent check? In the case of a malpractice liability, does the obligation "arise" when the representation was agreed to, or when the negligent or wrongful act was committed, or when the act was discovered, or when injury to the client occured? Perhaps this issue may be resolved by analogy to the extensive case law deciding when statutes of limitation begin to run. 6. Dissolution of LLPs The Minnesota statute addresses one problem that was not considered at all in the discussions about the Texas statute.54 What happens to the shield of limited liability if an electing LLP is dissolved during the course of the year in which it is registered as an LLP? This is a potentially serious problem since general partnerships have traditionally been viewed as ephemeral in nature and a technical dissolution of a partnership occurs whenever a partner dies or withdraws from the firm.55 Of course, in most situations the remaining partners continue the business much as before, but that is technically a new partnership. The dissolution of the old partnership and creation of the new may be completely seamless, and the participants may not be aware that from a strictly legal standpoint a new partnership has been created. If the registration is valid only for the partnership that exists at the time the registration is filed, the shield of limited liability will not extend to the new partnership. This creates a potential trap for the unwary partnership and could lead to the imposition of liability on partners despite the shield of limited liability. The Minnesota statute addresses the dissolution problem by providing, first, that the shield of limited liability "continues in full force for the dissolved partnership regardless of any dissolution, winding up, and termination of a limited liability," and, second, if the business is continued "by a successor general partnership . . . then the limited liability . . . also applies to that successor partnership until the expiration of the registration that the dissolved partnership had in effect . . . ."56 The term "successor general partnership" is not defined, but its ordinary meaning should encompass the partnership that continues with most of the same personnel using the same name as the LLP but without one or more of the former partners. It may also cover the same situation with a change in the firm name. This is not a completely satisfactory solution. While it probably covers the most common situations where some partners withdraw, it does not address, for example, the truly fractured partnership, for instance, where there are four partners and they split into two new firms with two partners each, or where nineteen partners remain and twenty-seven leave but the remaining partners continue to use the same name as the former, much larger partnership. Nor does it unambiguously address situations where new names are adopted for both partnership entities resulting from the fracture. Indeed, it may not address the situation where a new name is adopted for a small partnership that adds several new partners but no partners leave. There are several plausible solutions to this problem. One might consider changing the definition of "dissolution" so as to refer only to a process of winding up and termination. One might then make the shield of limited liability personal to each partner in an LLP rather than to the partnership itself, and allow each partner to carry that shield with her when she changes firms. This, however, might create problems when a covered partner decides to go into sole practice, when a covered partner moves to a general partnership that has not registered as an LLP, or when an uncovered partner moves to a partnership that has elected LLP status. Even more radical solutions, such as automatically providing limited liability for all profes sionals, might also be suggested. C.One- Person Partnerships? The Minnesota statute raises another interesting problem. In a sense it discriminates against sole proprietors because the shield of limited liability is available only to businesses having two or more owners. The usual view is that there is no legal separation between a proprietor and the business she owns, with the result that the proprietor is personally liable for all obligations of the business. However, a proprietor may obtain the Minnesota shield of limited liability by entering a partner ship with a straw party and registering as an LLP.57 This is not likely to be a problem under the Texas and Delaware statutes because the shield of limited liability only protects innocent partners from malpractice or negligence liabilities, and it is difficult to see how a sole proprietorship could commit malpractice or negligence and yet the proprietor be innocent of that malpractice or negligence under the control provisions of those statutes. In Minnesota, however, the shield of limited liability covers contract claims as well as tort claims, and there may be a strong incentive on the part of an individual proprietor to obtain the benefits of LLP status so as to avoid personal responsibility for contractual obligations she enters into as agent for her nominal LLP. I can easily foresee a broadening of the Minnesota statute to include one-person businesses. VII. Conclusions The original idea of providing "peace of mind" insurance against malpractice liability for innocent professionals, particularly for members of law firms and accounting firms, on its face seems to be plausible. It is pretty tough to strip an innocent partner of the bulk of his personal assets and require him to suffer the indignities of a chapter 7 bankruptcy proceeding because of the actions of another partner. Nor does this original idea lead to a major or radical extension of limited liability within the partnership form, particularly when contrasted with the modern rules relating to the personal liability of partners in the Revised Uniform Partnership Act. While it leads to problems and anomalies that are theoretically difficult to work out, these problems will arise only rarely. As my earlier comments in this paper make clear, however, I am not at all happy about the quiet reversal of the default rules about unlimited liability that appears to be well underway in the LLP statutes. At the very least, it leads to widespread confusion with other types of limited liability business forms.58 If one accepts the reality that the world is not composed solely of individuals who are well advised and sophisticated, the reversal of the normal default rule for general partnerships is likely to create significant injustice. It would be far preferable as a general policy matter, in my view, to retain the current default rules for general partnerships and try to fix the gaps in the limited liability shield of the Texas and Delaware statutes, if that is thought appropriate, by less revolutionary changes. I would like to make one concluding comment about all this. Bills proposing the creation of LLPs will inevitably be viewed as "legislation for lawyers" even though they cover other types of general partnerships as well. It is no secret that the legal profession is not held in the highest regard and esteem in many areas of society. Indeed, lawyers are viewed by many as generally greedy, shifty, tricky, and untrustworthy folk. I am afraid that widespread enactment of LLP statutes of the Minnesota type will, in the long run, cause further erosion of the image of the legal profession. We will be viewed as having "pulled a fast one" on society by the enactment of this legislation without any real justification or any real discussion. I do not have the same fear about statutes of the Delaware or Texas type, since they will be applied only very rarely. Statutes of the Minnesota type, on the other hand, will have application every time an LLP fails and its assets are insufficient to cover all of its liabilities. _______________________________ *Copyright 1995 by Robert W. Hamilton, Minerva House Drysdale Regents Chair in Law, The University of Texas at Austin School of Law. This paper was presented at the Symposium on LLCs, LLPs and the Evolving Corporate Form at the University of Colorado School of Law, February 17, 1995. 1.Tex. Rev. Civ. Stat. Ann. art. 6132b- 3.08(d) (West Supp. 1995). 2.Del. Code Ann. tit. 6, 1546(a) (1993). 3.Tex. Bus. Corp. Act art. 3.02(A)(7) (West Supp. 1995) (requiring that the articles of incorporation for a corporation contain a statement that the corporation will not commence business until it has received at least $1,000 for the issuance of shares). 4.Bart Ziegler, Top Accountants To Shield Partners from Lawsuits, Wall St. J., July 29, 1994, at C15. 5.It is possible that the partnership agreement may permit the capital reductions arising from the satisfaction of a malpractice liability to be allocated to the "guilty" parties rather than to all partners. However, this requires subtle exercises of judgment by someone (who almost certainly has a personal financial interest) within the partnership as to which individual partners were involved in the transaction giving rise to the liability. 6.Unif. Partnership Act 18(b) (1914). "The partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property." Id. 7.Del. Code Ann. tit. 6, 1515(b) (Supp. 1994). A similar amendment has also been proposed in Texas as part of an omnibus bill amending the state's general corporation and partnership statutes. 8.Id. The precise language of the Delaware statute covers "debts, obligations and liabilities of or chargeable to the partnership arising from negligence, wrongful acts or misconduct, whether characterized as tort, contract or otherwise." Id. A similar amendment to the Texas LLP statute has also been proposed. 9.In these hypotheticals it is possible that at some point principles of fraudulent transfer, preferences in bankruptcy, or breach of fiduciary duty may come into play to limit opportunistic conduct by one group or the other. 10.See, e.g., Tex. Rev. Civ. Stat. art. 6132b- 3.08(2) (West Supp. 1995). If the partnership assets are insufficient to satisfy the malpractice claim, the guilty partners will also have to contribute to discharge the balance of this claim. 11.It is possible that the innocent partners may be required to return the amounts distributed to them in the face of a major malpractice claim on a theory of fraudulent transfer or breach of fiduciary duty. These payments also may be recoverable in a federal bankruptcy proceeding. 12.If the remaining assets are insufficient to satisfy the ordinary business obligations (as well as the malpractice liabilities), the innocent partners will be required to contribute toward them. 13.These partners may also urge that the LLP's assets be used to negotiate a settlement of the malpractice liability on the theory that it is the most efficient use of the LLP's assets to reduce aggregate partnership liabilities. 14.Tex. Rev. Civ. Stat. Ann. art. 6132b- 3.08(a)(1)(A) (West Supp. 1995). 15.Id. art. 6132b-3.08(a)(1). 16.Id. 17.Id. art. 6132b-3.08(a)(1)(B). There is no indication of how this exception to the limited liability shield should be construed. In contrast, the District of Columbia statute imposes liability on partners who had "written notice or knowledge" of the negligence or malpractice without regard to whether the particular partner made efforts to prevent the negligence or malpractice. D.C. Code Ann. 41-146(a)(2) (Supp. 1994). The District of Columbia statute obviously creates far fewer problems of interpretation than the Texas provision but it hardly improves fairness or provides much protection for otherwise innocent partners. 18.Del. Code Ann. tit. 6, 1515(b) (Supp. 1994). 19.Tex. Rev. Civ. Stat. Ann. art. 6132b, 15(2) (West Supp. 1995). 20.La. Rev. Stat. Ann. 9:3431(A) (West Supp. 1995). 21.See, e.g., Junda Woo, Baker & McKenzie Is Told To Pay Punitive Damages, Wall St. J., Sept. 2, 1994, at B3. The law firm of Baker & McKenzie was held liable for a $6.9 million punitive damage award in 1994 based on a claim that a senior partner and "rain maker" in the intellectual property section of the firm had sexually harassed a legal secretary by, among other things, dropping candies in the pocket of her blouse and pulling back her arms to see which of her breasts was bigger. That is certainly intentional conduct. If Baker & McKenzie were an LLP, would the other partners be protected from personal responsibility for this conduct? 22.Del. Code Ann. tit. 6, 1546(a) (1993); Tex. Rev. Civ. Stat. Ann. art. 6132b- 3.08(d)(A) (West Supp. 1995). 23.A partnership may continue to be attractive, in A's eyes, because B's more stable practice may provide income in years in which A's practice is at the bottom of its cycle. 24.Several nationally known law firms from other states have settled similar claims based on malpractice or negligence arising out of their involvement in the collapse of the thrift industry. In several cases, settlements exceeded the available malpractice insurance and firm assets. In 1992, the New York firm of Kaye, Scholer, Fierman, Hays and Handler settled claims based on its representation of Lincoln Savings & Loan Association for a payment of $41 million; available insurance covered only $21.5 million. See John H. Cushman, Jr., $400 Million Paid By S. & L. Auditors, Settling U.S. Case, N.Y. Times, Nov. 24, 1992, at A1. The settlement was structured so as to spread out payments over four years. Similarly, in 1993, the Cleveland firm of Jones, Day, Reavis & Pogue settled claims also arising out of the collapse of Lincoln Savings for $51 million; of this amount, $19.5 million was not covered by insurance. See Saundra Torry, Paying the Price and Bearing the Burden, Wash. Post, Apr. 26, 1993, at F7. These law firm settlements did not cause the liquidation of the firms involved, and since the shortfall was to be paid in installments, presumably the personal liabilities so created were covered by a reduction in future "draws" of all partners. 25.See supra part V.A.2-3. 26.After all, most of the analysis in the last section is purely theoretical, armchair analysis that is probably long on imagina tion and short on practical application. So far as I know, none of these problems have actually arisen in real life. 27.If the firm has malpractice insurance sufficient to cover the entire exposure, the LLP will have no impact on partnership rules. See Tex. Rev. Civ. Stat. Ann. 6132b-3.08 (West Supp. 1995); Del. Code Ann. tit. 6, 1546 (1993). 28.See 1994 Minn. Laws ch. 539 (codified at Minn. Stat. Ann. 323.02-.47 (West 1995)). 29.Unif. Partnership Act 15 (1914). 30.Minn. Stat. Ann. 323.14, subd. 2 (West 1995). 31.Id. 32.Id. subd. 3. 33.Id. subd. 5. 34.Id. 302A.551, subd. 1 (West Supp. 1995). 35.See id. 323.14, subd. 2. 36.These statutes appear to be the model being used in several other states. I suspect that this is because they are newer and therefore believed to be better, not that they are better thought through. 37.See supra part V.3. 38.The assumption underlying the Minnesota statute appears to be that the property rights of innocent partners in the partnership should be determined as though no malpractice had ever occurred, or phrased another way, that innocent partners should suffer no ill financial effects from malpractice liabilities incurred by other partners. I see no inherent reason why this principle should be the one adopted. 39.See Larry E. Ribstein, The Deregulation of Limited Liability and the Death of Partnership, 70 Wash. U. L.Q. 417 (1992). 40.Law and economics scholars have suggested that unlimited tort liability is a desirable policy because the firm is compelled to bear the full social cost of its activities. See, e.g., Henry Hansmann & Reinier Kraakman, Toward Unlimited Shareholder Liability for Corporate Torts, 100 Yale L.J. 1879 (1991); Susan Woodward, Limited Liability in the Theory of the Firm, 141 J. Institutional & Theoretical Econ. 601 (1985). It also encourages careful monitoring of agents by partners and the purchase of an optional amount of liability insurance. See Alan O. Sykes, The Economics of Vicarious Liability, 93 Yale L.J. 1231 (1984). For the reasons set forth in the prior section, I doubt that the Texas or Delaware versions of the LLP will affect either the amount of liability insurance maintained by LLPs or the extent of monitoring of agents that will occur in these businesses. This is a result, basically, of the fact that the shield of limited liability is not entirely airtight, so that all partners have an incentive to monitor agents and assure there is adequate insurance coverage. 41.Independently of registered limited liability partnerships, a practice has developed in many professional partnerships of negotiating contractual limitations on responsibility of innocent partners for the negligence or malpractice of other partners. Such language sometimes appears in engagement letters that reflect the contract between a client and a law or accounting firm. Such contractual restrictions on liability may be part of a bargain with the client in return for a price concession by the partnership. 42.New York requires that notice of the creation of a registered limited liability partnership be published in newspapers. N.Y. Partnership Law 121-1500(a) (McKinney Supp. 1995). A notice must be published once a week for six successive weeks in two newspapers of the county in which the principal office of the registered limited liability partnership is located. Id. The notice must contain basically the same information as is required in the certificate creating the registered limited liability partnership. See id. I assume that the nominal reason for the publication requirement is to advise the citizenry of the major change in the default rule. In fact, I suspect, the principal proponents of the publication requirement were newspaper publishers. A publication requirement of this nature is simply ineffective, as a practical matter. 43.Perhaps the most bizarre suggestion that I have heard is that a limited liability default rule for partnerships is desirable because it is "consistent with the concern for the generally weaker and less aware party." Kindness suggests that I leave the source of this comment anonymous. It is of course true that there are cases in which persons inadvertently create a general partnership without appreciating the liability implications of this action. There are also doubtless some unsophisti cated persons who knowingly become partners in a partnership without appreciating the implications. However, if one considers the population of unsophisticated persons who deal with partnerships and the population of unsophisticated persons who become partners, it is clear that protection of the "weaker and less aware party" is served by retaining the current default rule, not by reversing it. 44.See supra part V.3. 45.Distributions once made to the innocent partners can be recovered if the distributions violate an equity insolvency test. See infra part VI.B.4. 46.Minn. Stat. Ann. 323.14, subd. 2 (West 1995). 47.Such an agreement arguably may be within the suretyship provision of the statute of frauds. 48.See, e.g., Cargill, Inc. v. Hedge, 375 N.W.2d 477 (Minn. 1985); Roepke v. Western Nat'l Mut. Insurance Co., 302 N.W.2d 350 (Minn. 1981). 49.I should perhaps add that I have never understood why this factor is given the prominence that it has. The Texas piercing the corporate veil statute now states expressly that this test is not to be a factor in piercing the corporate veil in contracts cases. Tex. Bus. Corp. Act Ann. art. 2.21(A)(3) (West Supp. 1995). It remains to be seen, however, whether Texas courts will ignore scores of cases in which this factor is given central prominence and enforce this statutory command. 50.The Texas statute provides that "actual fraud" should be the test for holding shareholders personally liable in contract cases. Id. A(2); Western Horizontal Drilling, Inc. v. Jonnet Energy Corp., 11 F.3d 65 (5th Cir. 1994). The statute does not address tort cases, which usually present complex questions of the adequacy of contributed capital, distribution policies, and the use of funds for insurance or other purposes. 51.The distribution rules applicable to LLCs may be a more appropriate reference point in these states. 52.Minn. Stat. Ann. 323.14, subd. 2 (West 1995) (emphasis added). 53.Tex. Rev. Civ. Stat. Ann. art. 6132b- 3.08(a)(1) (West Supp. 1995) (emphasis added). 54.A possible explanation for this may be that the issue will arise regularly under the Minnesota statute but less frequently under statutes that provide a shield of limited liability only for negligence and malpractice claims. 55.This is certainly true under Unif. Partnership Act 29 (1914). The Revised Unif. Partnership Act 601 (1993), substitutes the word "dissociation" for the word dissolution. This newer version of the uniform act appears to assume (but nowhere states explicitly) that a partnership continues despite the dissociation of a partner. Id. It uses the word "dissolution" in several sections in the context of a "dissolution and winding up." See, e.g., Revised Unif. Partnership Act 603(a) (1993). I assume that the addition of a new partner to a partnership without more is not a "dissolution" or "dissociation" under either statute. Id. See also Unif. Partnership Act 17 (1914). 56.Minn. Stat. Ann. 323.14, subd. 4 (West 1995). 57.Usually, if a proprietor desires to have limited liability she will incorporate the business. However, it may be cheaper and may avoid tax liabilities arising from the transfer to the corporation to obtain the benefit of limited liability by electing to become an LLP with a nominal partner controlled by the proprietor, e.g., a trust for one's children. 58.In the stories about the change in business form of the "Big Six" accounting firms, the most common confusion appeared to be between limited liability companies, on the one hand, and limited liability partnerships of the Delaware variety, on the other. See Three Accounting Firms Now Limited Partnerships, Wall St. J., Aug. 2, 1994, at A4. This confusion seems clearly to be based on the similarity of the names and not on a similarity of the two forms of business. This confusion will certainly be compounded if the LLP becomes economically indistinguishable from the LLC.