War of the worlds: Partnerships vs. LLCs
New Hampshire general partnership law has many grave flaws
The original New Hampshire LLC Act was enacted in 1993. Before then, if the owners of relatively small multi-owner New Hampshire business start-ups wanted federal partnership taxation (which, for many such businesses, is the best possible federal taxation), they had to form them as general partnerships.
However, New Hampshire general partnership law had — and still has — many grave flaws. The biggest is that each of the partners has personal liability for claims against the partnership and against each other partner. Thus, if any partner of such a partnership commits negligence or other misconduct against a third party in connection with the partnership’s business, not only that partner but also all of the other partners will be liable.
What if you formed a business before 1993 (or, for that matter, after 1993), and, in order to get partnership taxation, you formed it as a New Hampshire general partnership? And what if you’re still doing business through that general partnership? What should you do — and what should the thousands of other owners of active New Hampshire general partnerships do — to protect yourself from personal liability for misconduct by your partners?
You can do either of two things:
• First, you can register your partnership with the Secretary of State as a “limited liability partnership” (a LLP). You won’t need a lawyer’s help in order to do this registration. Just go online to sos.nh.gov. The initial and annual filing fee is $100, and there is no conceivable downside to your filing.
• Second, you can make a “statutory conversion” of your partnership to a LLC. This conversion is relatively simple from a legal viewpoint and very simple from a tax viewpoint. However, the statutory conversion documentation is a bit complicated and will cost you a minimum of several hundred dollars in legal fees (and maybe significantly more).
So should you register your general partnership as an LLP or convert it to an LLC?
The answer depends on the facts, but the key consideration is, if you’re on a tight budget, you should simply register your partnership as an LLP.
However, if you can afford modest legal fees, you should convert your partnership to an LLC. The main reasons are these:
The liability shield of LLCs is stronger in some states outside New Hampshire than the LLP shield. If your business operates in multiple states, you want this stronger shield.
LLCs have two asset protection features besides liability shields — namely, “pick-your-partner” protections and “charging order” protections — that are much stronger than the corresponding partnership protections.
LLCs are more flexible than partnerships with regard to many important legal issues, including key fiduciary issues.
Finally, if you formed your partnership before 1993, it’s a virtual certainty that either when you formed it, you had no written partnership agreement or, if you did have one, it has long since become obsolete. Thus, even if you merely register your general partnership as an LLP, you’ll very probably need a new inter-owner agreement.
This agreement, if you hire a competent lawyer to draft it, will have to address a lot of issues and thus will cost significant legal fees. If you’re spending this money, you may as well go whole hog and convert your partnership to an LLC instead of merely registering it as an LLP.
John Cunningham, of counsel to the law firm of McLane, Graf, Raulerson & Middleton, can be reached at 603-856-7172 or email@example.com.