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Lessons from the rise of the US limited liability partnership

Listed author(s):
  • Kern Alexander
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    The limited liability partnership has been heralded as a cost-effective way of doing business for professional firms that seek to reduce the personal liability risk of partners who are not directly involved in negligent acts or wrongdoing. The LLP business form has been adopted by all US states and has proved widely popular for lawyers and accountants/auditors in reducing vicarious and joint and several liability exposure for the rendering of professional advice. The LLP structure allows professional firms to retain the benefits of the partnership structure, such as tax breaks and ease of operation, while reducing the personal liability of individual partners for torts and negligent acts committed by other partners. This paper examines the rise of LLPs statutes in the US by analysing the LLP statutes of three states that have proved prominent in recent litigation involving professional firms performing services in a negligent or reckless manner. The paper suggests that the liability protections of the US LLPs have not reduced risk, but simply shifted it onto customers, pensioners and the investing public. The liability limitation provisions of the US LLPs create a disincentive for professional firms to adopt effective risk management systems to control negligence and malfeasance within the professional firm. The paper suggests that the UK LLP statute addresses some of these issues because it requires LLPs to operate in a transparent manner, but the courts have yet to determine the extent of protection against personal liability that will be available to members not directly involved in negligence or wrongdoing. Future research should examine the implementation of the UK LLP statute and whether it can address the needs of business without increasing risks for consumers, employees and the investing public.

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    Paper provided by Centre for Business Research, University of Cambridge in its series Working Papers with number wp255.

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    Date of creation: Dec 2002
    Handle: RePEc:cbr:cbrwps:wp255
    Note: PRO-1
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