On January 1, 2000, the Delaware Revised Uniform Partnership Act, 6 Del. C. § 15-101, et seq. (the "Act"), became effective. Except in limited circumstances, the Act replaced the Delaware Uniform Partnership Act, 6 Del. C. § 1501, et seq., as the governing statute for Delaware general partnerships. Under the Act, a business can be formed as, or converted or merged into, a Delaware general partnership. In addition, under the Act, the partners of a Delaware general partnership can be afforded a certain level of protection against liability by qualifying the partnership as a limited liability partnership (an "LLP").
The advantages of an LLP include the ease of forming an LLP under the Act, the protections contained in the Act relating to the liability of partners of an LLP, the freedom of contract principles and flexibility of Delaware's business statutes and the tax advantages that a general partnership possesses under federal and State of Delaware income tax law (i.e., avoidance of taxation at the entity level).
Delaware General Partnerships Generally
In general, a Delaware general partnership is formed by the association of two or more persons or entities to carry on a business for profit or any business or activity not for profit. It is relatively easy to form a Delaware general partnership under the Act. In most instances when a general partnership is formed, the parties will have intended to form a general partnership. Accordingly, the parties will typically have a written partnership agreement, detailing the basic agreement between the partners. It should also be noted that under Delaware law a general partnership may be formed even when this is not the express intent of the parties because a general partnership is the default entity any time there is an association of two or more persons or entities to carry on as co-owners a business for profit (assuming, of course, that they have not formed another type of statutory entity).
In addition, the partnership may wish to consider filing a Statement of Partnership Existence with the Secretary of State of the State of Delaware. As noted below, there are certain circumstances where a Statement of Partnership Existence must be filed. If the partnership chooses to make such filing, the required contents of the Statement of Partnership Existence are few - the name of the partnership and the address of the registered office and the name and address of the registered agent of the partnership in Delaware for service of process. The Statement of Partnership Existence may state other matters, such as matters relating to the authority, or limitations of authority, of some or all partners, and in certain instances must state other matters.
In particular, upon formation of a general partnership, under the default provisions of the Act, the partnership is deemed to be a separate legal entity, property acquired by the partnership is property of the partnership and not of the partners individually and no partner has an interest in specific partnership property. If it is desired that the partnership not have separate legal entity status, or that the partners be able to own property acquired by the partnership individually, have an interest in specific partnership property or be deemed co-owners of partnership property, such "opt-outs" of the default provisions of the Act much be expressed in the Statement of Partnership Existence and in the partnership agreement.
It is worth noting that under the Act the names of the partners of the partnership need not be listed in the Statement of Partnership Existence. Moreover, under the Act a Statement of Partnership Existence need not be executed by all of the partners, but rather can be executed by one or more partners or one or more "authorized persons" as authorized by the partnership agreement.
Under the Act, an LLP is for all purposes a general partnership. However, as discussed below, by becoming an LLP, the partners of a Delaware general partnership are able to limit their liability. It is fairly simple to become an LLP. Under the Act, unless otherwise provided in the partnership agreement, the necessary approval to become an LLP is the same vote that is otherwise necessary to amend the partnership agreement or, in the case of a partnership agreement that expressly considers obligations to contribute to the partnership, the vote necessary to amend those provisions. For this reason, if a partnership is contemplating becoming an LLP it may be advisable expressly to approve such qualification, as well as to authorize one or more partners or other authorized persons to execute and make the filings necessary for the partnership to qualify and continue as an LLP (which are executed in the same manner as a Statement of Partnership Existence), in its partnership agreement.
Assuming such approval and authorization to become an LLP, the partnership initially needs to file a Statement of Qualification with the Secretary of State of the State of Delaware. The Statement of Qualification must contain the name of the partnership (which, as stated above, must include as the last words or letters of its name "Limited Liability Partnership," "L.L.P." or "LLP"), the address of the registered office and the name and address of the registered agent of the partnership in Delaware for service of process, the number of partners of the partnership (although the specific names of such partners do not need to be listed), a statement that the partnership elects to be a limited liability partnership and a specific, certain future effective date or time of the Statement of Qualification if it is not to be effective upon filing.
In addition, to maintain its status as such, the LLP is also required to file an annual report with the Secretary of State of the State of Delaware by June 1 of each year following the calendar year in which the partnership initially files the Statement of Qualification. The annual report must state the name of the LLP, the number of partners of the partnership (the specific names of such partners do not need to be listed) and the address of the registered office and the name and address of the registered agent of the partnership in Delaware for service of process. An LLP is not required to make any filing, or amend a previous filing, due solely to changes in the number of partners of the partnership, as the annual reports are the only necessary filings to reflect such changes.
Liability of Partners
Delaware General Partnerships Generally
In general, under the Act (if not an LLP), all of the partners of a Delaware general partnership are liable jointly and severally for all obligations of the partnership, except that a partner is not personally liable for any obligation of the partnership incurred before its admission to the partnership as a partner. The result, as one would expect with a general partnership, is essentially that each partner is personally liable for all of the obligations of Partnership that are incurred while such person or entity is a partner.
The major advantage of a Delaware general partnership's becoming an LLP is that the partners are protected from the general rule of partner liability as stated above, and in this way are able to limit their liability. Under the Act, the obligations of the partnership incurred while an LLP, whether arising in contract, tort or otherwise, are solely the obligations of the partnership. Under the Act, a partner of an LLP is not personally liable, directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for such an obligation of the LLP, solely by reason of being or so acting as a partner. In addition to relying on the Act for this limitation of liability, a statement to this effect should also be contained in the partnership agreement. Of course, a partner may still have liability for its own actions or in accordance with the partnership agreement.
The intent of the Act is to offer similar limitations against personal liability to partners of an LLP that are afforded to managers and members of a limited liability company, limited partners of a limited partnership (and general partners of a limited liability limited partnership) and shareholders of a corporation, each as organized under the applicable Delaware statute. It is important to note that there is a concern that the limitation of liability of partners of an LLP may not be respected in certain jurisdictions (particularly those that have not enacted a limited liability partnership statute), and such jurisdictions may instead apply the general rules of liability to the partners of a general partnership. While the concern over the limitation of liability being respected continues to lessen, as a result and based on certain other factors, the number of LLPs is relatively few, with many entities instead opting for another form unless there is a special reason to utilize a general partnership.
Additional Advantages of Forming an LLP in Delaware
Delaware's strong history of preserving the freedom of contract is maintained in the Act. Section 15-1201 of the Act specifically provides "[t]he rule that statutes in derogation of the common law are to be strictly construed shall have no application to this chapter." In addition, Section 15-103(d) of the Act states that "[i]t is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements."
In addition to the forgoing rules of statutory construction, the Act itself allows for a great amount of flexibility to modify the default provisions of the Act in a partnership agreement. In fact, other than the relatively limited number of provisions of the Act that Section 15-103(b) of the Act provides restrictions on modifying, nearly all other provisions of the Act may be modified in the partnership agreement. Such flexibility allows for partners in the partnership agreement to, among other things, specifically address management of the partnership, distributions, voting rights and indemnification, in order to appropriately reflect the intentions of the partners.
The partners, in the partnership agreement, may also modify certain duties of partners to the partnership and other partners. Similarly, Section 15-103(e) of the Act offers additional protection to partners in stating that "[a] partner or another person shall not be liable to the partnership or the other partners or another person that is a party to or is otherwise bound by a partnership agreement for the partner's or other person's good faith reliance on the provisions of the partnership agreement." Other advantages of Delaware general partnerships include the ability of, and relative ease with which, a partnership can merge and convert, as well as the ability of a partnership to maintain continuity notwithstanding changes in its partners.
The Delaware principles, and Act provisions, relating to statutory construction, combined with the many flexible and beneficial provisions of the Act, enable a Delaware general partnership to adapt to the ever-changing needs of a business entity. And to the extent that advances in the law of general partnerships allow for more flexibility, Delaware general partnerships will be able to take full advantage with confidence that the Delaware courts will respect the provisions of partnership agreements.