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Q: Leaving a general partnership ( Answered,   0 Comments )
Question  
Subject: Leaving a general partnership
Category: Business and Money > Small Businesses
Asked by: ziggystardog-ga
List Price: $50.00
Posted: 10 Jul 2006 22:23 PDT
Expires: 09 Aug 2006 22:23 PDT
Question ID: 745185
I am a partner in an architecture firm that has been in business for 3
years as a general partnership in California.  For family reasons, I
will be leaving
the partnership next year and most likely moving out of state.  We are
trying to consider options for
whether I just become an inactive partner (silent?) or whether I
dissolve the partnership and the business continues as a sole
proprietorship.  We are also considering changing our status into an
LLC, but that may only have tax benefits.  I am interested in
retaining ties to the firm if I can limit or remove my liability once
I am no longer working in the firm.  What is my best option?
Answer  
Subject: Re: Leaving a general partnership
Answered By: jdb-ga on 11 Jul 2006 12:01 PDT
 
Hello, 

I am responding to your question regarding leaving a general
partnership and which ownership structure would be the best in terms
of liability. Although Google Answers does not give legal advice,
below are website resources that give you relevant information you can
use to help your decision. After reading these, you may also wish to
consult a lawyer to confirm your decision and to help you with the
details. Below I list resources on the various options and option and
the advantages and disadvantages of each. Among these is an LLP
(limited liability partnership), often used by architects and other
professionals. In the state of California only certain types of
businesses can form an LLP, including architects. The more detailed
resources follow the beginning, more general resources below.

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You mentioned that you wanted to limit your liability. You also wrote
that you were considering an LLC, but thought that it only provided
tax benefits.

An LLC could possibly give you the limited liability that you want.
This site discusses the advantages of an LLC:

"What are the advantages of an LLC?

The most important advantages of an LLC are: 

Flexible Management Structure and Income Distribution: An LLC allows
the most flexible management agreements, and the most freedom to
distribute income in any manner that the members agree upon without
the need of additional filings.
Limited Liability: An LLC provides the same amount of liability
coverage as that of a traditional corporation. In general, a member is
only liable for the amount invested in the LLC. Articles of
Organization form and the LLC fee structure form.
Pass Through Taxation: Like a partnership or an S corporation the LLC
allows for pass-through taxation, which means that the income from the
LLC is only taxed at the individual level as opposed to both the
individual level and the corporate level as in traditional C
corporations.
 
What are the disadvantages of an LLC?

There are few true disadvantages to the LLC entity, however the most
common cited are:
More Paperwork than a partnership: An LLC allows the most flexible
management agreements, and the most freedom to distribute income in
any manner that the members agree upon without the need of additional
filings.
Dissolution Date: In some states an LLC can only exist for a set
number of years; however, this seems to be changing as more and more
states allow for unlimited duration LLCs.
Fund Raising: An LLC does not have the same abilities to raise capital
through the equity markets that a C corporation would enjoy.
Relatively new entity type: The LLC is the newest type of corporate
formation and as such there is not as much legal precedent set
regarding its activities."

http://www.info-pedia.com/llc.html

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There is also a type of LLC that is called a Delaware Series:

"Membership interests of LLCs in some states can be assigned, and the
economic benefits of those interests can be separated and assigned,
providing the assignee with the economic benefits of distributons of
profits/losses (like a partnership), without transferring the title to
the membership interest "

"Many form an LLC in order to protect personal assets from a legal
claim relating to their real estate investment. Additional liability
protection may be gained by properly forming and maintaining a
separate LLC to hold each property or business entity.

By forming a separate LLC to own and hold each legally titled separate
property or business entity, theoretically only the assets owned by a
specific LLC would be subject to claims or lawsuits arising against
that LLC. However there are costs and administrative burdens
associated with properly forming, qualifying and maintaining each
separate LLC. Another option may be to form a Series LLC[3], a.k.a.
the "cell" LLC, if permitted under applicable laws. Although each unit
of a Series LLC can own distinct assets, incur separate liabilities,
and have different managers and members, a Series LLC pays one filing
fee and files one income tax return each year. Furthermore, liability
incurred by one unit does not cross over and jeopardize assets titled
in other subsidiary units of the same Series LLC. "

http://en.wikipedia.org/wiki/Limited_liability_company

Although most sites agree on the advantages and disadvantages of an
LLC there is conflict on whether or not there is more or less paper
work.

"Advantages of an LLC
No requirement of an annual general meeting for shareholders. 
No loss of power to a board of directors. 
Corporations are enduring legal business entities, with lives that
extend beyond the illness or even death of their owners, thus avoiding
problematic business termination or sole proprietor death.
Corporations can raise capital through stock sales. 
Much less administrative paperwork and recordkeeping. 
Pass-through taxation (i.e., no double taxation). 
Limited liability (meaning that the owners of the LLC, called
"members," are protected from liability for acts and debts of the
LLC).
Using default tax classification, profits taxed personally (at the
member level, not at the LLC level).
Check-the-box taxation. An LLC can elect to be taxed as a sole
proprietor, partnership, S-corp or corporation, providing much
flexibility.
Can be set up with just one natural person involved. 
Membership interests of LLCs in some states can be assigned, and the
economic benefits of those interests can be separated and assigned,
providing the assignee with the economic benefits of distributons of
profits/losses (like a partnership), without transferring the title to
the membership interest (i.e., See VA and Delaware LLC Acts).
LLCs in some states are treated as entities separate from their
Members (See VA LLC Act), whereas in other jurisdictions case law has
developed deciding LLCs are not considered to have separate juridical
standing from their members (See recent D.C. decisions)."

http://en.wikipedia.org/wiki/Limited_liability_company

You mentioned that there could be tax benifits with an LLC  and that
the firm is in California.

"Many states, including Alabama, California, Kentucky, New Jersey, New
York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or
capital values tax on LLCs. In essence, this franchise or business
privilege tax is the "fee" the LLC pays the state for the benefit of
limited liability. The franchise tax can be an amount based on
revenue, an amount based on profits, or an amount based on the number
of owners or the amount of capital employed in the state, or some
combination of those factors."

http://en.wikipedia.org/wiki/Limited_liability_company

-------------------------------------------------------------------------------
Have you considered an LLP? This is an option for architects in California.

"A limited liability company (LLC) differs from a limited liability
partnership (LLP) in that the LLP has the organizational flexibility
of a partnership. Furthermore, LLCs are more likely to be subject to a
state's franchise taxes."

"Although found in many business fields, the LLP is an especially
popular form of organization among professionals, particularly
lawyers, accountants and architects. In some U.S. states (including
California and New York), LLPs can only be formed for such
professional uses."

http://en.wikipedia.org/wiki/Limited_liability_partnership

-------------------------------------------------------------------------------

This site regards LLPs in the state of California:

"General provisions governing limited liability partnerships are found
in the California Corporations Code, Sections 16951 et seq. Limited
liability partnerships may only be formed by licensed persons for the
practices of public accountancy, law or architecture."

http://www.ss.ca.gov/business/llp/llp.htm

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From Yahoo Small Business, an article excerpted from NOLO, the law
resources portal site:

"Also, keep in mind that not all states will let all businesses be
organized as LLCs. For example, California won't let some
professionals, such as accountants, architects, and massage
therapists, form LLCs."

http://smallbusiness.yahoo.com/r-article-a-2644-m-4-sc-20-must_an_llc_be_formed_in_the_same_state_in_which_it_will_operate-i

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It can be a simpler process to convert to an LLP:

"Many states in their LLP act provide that an existing partnership can
convert over simply by paying a fee and registering the existing
entity as an LLP (generally with the Secretary of State). In contrast,
in many states, the conversion of a general partnership to an LLC will
require the liquidation or merger of the old partnership in the
process of the formation of the LLC."

http://www.ukincorp.co.uk/s-7N-llp-vc-llc.html

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Here is the NOLO law site's "Limited Liability Company (LLC) - Resource Center":

http://www.nolo.com/resource.cfm/catID/BAAE1B67-F54A-41B4-91943A51F56C3F79/111/182/245/

Including:

Forms
Step-by-Step Form an LLC 
Limited Liability Company FAQ 
LLC Basics
Creating an LLC Operating Agreement
How to Form an LLC
How LLCs Are Taxed

And:

"Clarification on Type of Businesses That Can Form a California LLC":

http://www.nolo.com/support/detail.cfm/ObjectID/C89E750C-10E6-41B4-B723B77EA1698ED1

"The California Attorney General (AG) has issued an opinion stating
that businesses that render services under nonprofessional,

occupational licenses may form limited liability companies (LLCs) in
California. (Businesses and individuals who render services under
professional licenses, however, may not.)

The opinion distinguishes occupational licenses -- those based on
character, responsibility, good faith, and financial requirements --
from professional licenses, which are based on education, training,
and testing prerequisites. It now appears that the professionals who
must form a professional corporation if they incorporate in California
(doctors, architects, lawyers, pharmacists, and so on) are the same
group of professionals who can?t form an LLC in the state. There may
be others who fall into this group under the general standard adopted
by the AG.

The California Secretary of State will accept articles of organization
from any licensed business (because it does not want to decide which
businesses operate under an occupational as opposed to professional
license), but acceptance of articles by the secretary of state doesn?t
mean you have created a valid LLC (or have limited liability
protection). If your business operates pursuant to a license, you
should take the following steps to make sure you create a valid LLC:

Call the state board that regulates your profession and ask if you are
allowed to form an LLC in California (refer specifically to Attorney
General Opinion 04-103).
If the answer is ?yes,? ask to get the answer in writing and include a
copy of the letter from the state board when you submit your LLC
articles to the secretary of state.
If the board doesn?t know the answer, consult a lawyer to help you get
a definitive answer.

-------------------------------------------------------------------------------
This PDF file article discusses LLP liability for architects in
California and provides an overview of types of partnerships in
California (See link for full 16 page article):

"OVERVIEW OF CALIFORNIA PARTNERSHIPS, LLCs, AND LLPs; FACTORS IMPACTING CHOICE OF 

ENTITY"
By
Bernard J. Vogel, III, Esq.1
Silicon Valley Law Group

"Limited Liability Partnerships (?LLPs?). LLPs can protect the
personal assets of partners of architecture, public accountancy, and
law firms from liability for obligations arising from real practice
acts, errors, or omissions. Corp. Code  16306(c). This limited
liability protection does not affect a partner?s liability to third
parties for his or her own tortious conduct or malpractice. CCC 
15015(d) and 16306(e). LLP must comply with statutory security
requirements, totaling at least $100,000 per licensed person rendering
professional services on behalf of the LLP, subject to an annul
minimum and maximum total coverage.

The minimum for all LLPs is $500,000 for LLPs with fewer than five
licensed persons; the maximum for an architecture LLP and a public
accountancy LLP is $5 million, and the maximum for alegal services LLP
is $7.5 million. CCC  16956(a). c. Corporations."

http://www.svlg.com/OverviewofCAPartnerships.pdf

-------------------------------------------------------------------------------
NOLO - Ownership Structures

"Chart: Ways to Organize Your Business
This chart lists the pros and cons of corporations, LLCs,
partnerships, sole proprietorships, and more.":

Type of Entity 
Main Advantages 
Main Drawbacks 

http://www.nolo.com/article.cfm/objectID/B9655EB0-F6FE-4DA4-8B027E925D28F777/111/182/ART/

Here is a NOLO article discussing the types of partnership structures in depth:

NOLO - Partnership 
"Partnership Basics
Learn more about the simplest business structure for companies with
more than one owner."

http://www.nolo.com/article.cfm/objectID/BC12D427-ED89-439F-AECBD53DC24EB012/111/182/275/ART/

And NOLO's "Partnerships FAQ":

http://www.nolo.com/article.cfm/objectID/D2C7200B-28A8-49FB-9EA5E2B7E7F15CB5/111/182/275/FAQ/

Including discussion for each type of partnership in terms of:

How are partnerships taxed?
Are owners of a partnership personally liable for business debts?
What happens if one partner wants to leave the partnership?
What are the differences between a partnership and a limited liability company?
What is the difference between a general partnership and a limited partnership?

------------------------------------------------------------------------------
"LLC vs LLP"

"LLC vs. LLP.   A limited liability partnership (LLP) differs from a
limited liability company (LLC) in that the members of an

LLP are liable for the debts of the partnership, but in an LLC, each
member is only liable to the extent of their investment in the
company. Both entities are taxed as partnerships, avoiding the problem
of "double taxation" often found in corporations.

LLPs.   In the United States, each individual state has its own law
governing the formation of Limited Liability Partnerships. The
original purpose of the LLP was to avoid the tax consequences of
converting a general partnership to an LLC. However, in the last 5
years, most state laws have evolved to make this conversion a tax free
event. Accordingly, one of the main purposes of converting a general
partnership to an LLP, rather than an LLC, no longer exists.

Usage.   The LLP is most popular among professionals, particularly
lawyers and accountants. Each partner can be held jointly and
severally liable for the ordinary business debts of the company, but
if one partner commits an act of professional malpractice in the
course of the partnership's business, that partner alone is liable to
the injured party. For ordinary debts, every partner is fully liable
even to the extent of their personal property."

http://www.xlistings.net/xlist/legal/business/incorporate/llpvllc?id=1

------------------------------------------------------------------------------

Scroll down this UK Company Formation site's guide to forming US
companies to the section heading:

"LLPS VS. LLCS: WHICH IS A BETTER CHOICE?" and "LLPS VS. PROFESSIONAL CORPORATIONS"

Following the summary is a comparison chart that is more detailed than NOLO's.

http://www.ukincorp.co.uk/s-7N-llp-vc-llc.html

-------------------------------------------------------------------------------
Here is the site of the "Architects Engineers Professional Network"
for information on "Liability, Insurance & Risk Management
Information" with this thorough article:

"Limited Liability Partnerships and Limited Liability Companies
Are these the entities of choice for a/e firms in the next millennium?"

http://www.aepronet.org/pn/vol12-no1.html

Contents

INTRODUCTION 
HISTORICAL BACKGROUND 
THE ADVANTAGES OF LLCs AND LLPs 
Limited Liability 
Flexible Management Structure 
No Corporate Formalities 
Pass-Through Tax Treatment 
Flexible Capital Structure 
DISADVANTAGES OF AN LLP OR LLC 
Restrictions on Ownership 
Franchise Taxes and Minimum Security 
Liability for Improper Distributions 
Minimum Number of Owners 
Interests Not as Freely Transferable 
LLPs and LLCs Not Available in All States 
Limited Merger Opportunities 
ADVANTAGES OF A CORPORATION 
DISADVANTAGES OF A CORPORATION 
ADVANTAGES OF A GENERAL PARTNERSHIP 
DISADVANTAGES OF A GENERAL PARTNERSHIP 
CONCLUSION 
CHECKLIST FOR ANALYZING THE PROS AND CONS OF CONVERSION TO AN LLP OR LLC 

-------------------------------------------------------------------------------

I hope these resources are useful. Please let me know if I can be of
further assistance. jdb-ga

Clarification of Answer by jdb-ga on 11 Jul 2006 12:21 PDT
I would just like to add that I provided some sites discussing that in
the state of California architects are not able to form an LLC. You
mentioned that you were considering forming an LCC. One of these sites
gives ways of clarifying if a business qualifies for an LCC.
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