A partnership with one partner?

The Case of the Departing Penultimate Partner

Can one hand clap? There are many disadvantages associated with structuring a business as a general partnership. One disadvantage is that, unlike limited liability companies and corporations, the departure of one of the remaining two owners will, in all likelihood, result in the dissolution of the company and will, in all certainty, create legal and practical challenges. Consider the following…

The general partnership…

A general partnership (“partnership”) is a for-profit business entity that is formed by the mere joining together of the co-owners rather than the filing of a document with a state commercial recording office. Traditionally, general partnerships have been very fragile entities, with many things potentially causing their dissolution. As partnership law evolved, efforts have been made to add stability to partnerships and reduce the number of events that cause their dissolution. Nevertheless, partnership law continues to define a partnership as a business that has “two or more” co-owners (i.e., “partners”). The definition is clear and the concept seems intuitive—a partnership must have at least two partners. So, what happens if a penultimate partner dissociates (i.e., “leaves the partnership”) either involuntarily (e.g., by way of dying) or voluntarily (e.g., by way of withdrawing)?

Partner dissociation…

Death serves to “dissociate” the partner, and the deceased partner’s estate does not automatically take the decedent’s place as a partner. Similarly, the voluntary withdrawal of a partner serves to “dissociate” the partner. Where the partnership has at least two remaining partners after the dissociation, the partnership does not necessarily dissolve, but under partnership law, the partnership is required to buyout the interest of the dissociated partner. However, where it is the penultimate partner who dies or withdraws, courts have held that the buyout provision does not apply because a partnership cannot exist with only one “partner.” Furthermore, courts have reasoned that, insofar as a partnership cannot continue with a single partner, the dissociation of a partner from a two person partnership necessarily triggers dissolution of the partnership. Some legal scholars disagree with this reasoning. However, the drafters of the very influential model “Uniform Partnership Law” appear to concur with the judicial interpretations. Under the most recent version of the model law, it is clear that a partnership is dissolved, and its business must be wound up, if the partnership does not have at least two partners for at least ninety (90) consecutive days.

Concluding thoughts…

The departure of a penultimate partner can result in the dissolution of the company or create legal and practical challenges for a general partnership. Proactive partners may, by way of a well-drafted partnership agreement, mitigate the risks of such departures. However, business owners will likely be better served if they structure their business as a limited liability company or corporation instead of a general partnership. Please feel free to contact me if you would like more information on structuring your business.

5/18/2017

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Should I transfer my home to an LLC?

I am often asked whether to transfer residential property into a limited liability company (LLC). Consider the following…

Why transfer residential property to an LLC?

It is not uncommon for an individual or a group of individuals to derive rental income from residential property such as a vacation home, a shore house or multifamily house. Like any business endeavor, if the property is owned by an individual (i.e., sole proprietorship) or a group of individuals (i.e., a general partnership), the owner(s) face unlimited personal liability for debts that arise in the course of operating the property. As a general rule, owners of LLCs are not personally liable for the LLCs. Insofar as there are risks associated with operating a rental property, it is not unreasonable to consider limiting the risks by owning the property through an LLC rather than in one’s individual capacity. The formation of an LLC is easy enough. However, merely forming an LLC does not accomplish the goal.

Key considerations and steps regarding the transfer?

  • Conveying the property. LLCs are legally distinct from their owners, and merely forming an LLC does not make affect the current ownership of the property. Once the LLC is formed, the property must be conveyed by deed to the LLC—even if the current owners of the property are also the owners of the LLC.
  • Realty Transfer Fee. Conveying property by deed into an LLC could trigger the requirement to pay a realty transfer fee.
  • Title insurance. If the property is currently covered by a title insurance, the policy may cover the LLC. A new policy or policy endorsement may be required.
  • Casualty and liability insurance. If the property’s current casualty (e.g., fire) and liability (e.g., slip and fall) policies insure the individual owners, new policies or policy endorsements many be needed.
  • Mortgages. If the property secures a mortgage loan, the transfer of the property may trigger a “due on transfer” clause (i.e., require that the mortgage loan be paid-off). The current mortgage will likely need to be assigned or paid off in favor of a new mortgage. Available mortgage rates and terms for a corporate entity (e.g., LLC) may be less favorable than individual loans.
  • Eviction-Ejectment. In certain cases, it may be more difficult for a “corporate” landlord to remove tenants from the premises.
  • Leases. If the tenancies are subject to leases, the current landlords will need to assign the leases to the LLC.
  • Zoning and land use. The conveyance of property may trigger the need to obtain a new certificate of occupancy or otherwise trigger undesirable zoning or land use compliance matters.

Should the property be transferred?

Clearly, transferring income producing residential to an LLC requires more than the mere formation of an LLC. Many more steps will be required, and each step will have an associated expense. In addition, the transfer of the property could trigger zoning or land use compliance issues. Thus, determining whether the property should be transferred into an LLC requires a thorough assessment of the potential risks associated with the ownership and rental of the property, the ability to insure those risks, the cost of conveying the property, the impact of the conveyance on existing mortgage loans, insurance policies and leases, and whether a conveyance will trigger any new or undesirable zoning or land use compliance issues.

Would you like more information?

Please feel free to contact me for more information about transferring property to an LLC.

 

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

 

5/16/2017

LLC and Business Corporation Compared

 

LIMITED LIABILITY COMPANIES AND BUSINESS CORPORATIONS are just two of the wide variety of business structures to choose from when deciding how to organize and operate business ventures. Other alternatives include the sole proprietorship, general partnership, limited partnership, and limited liability partnership. For a number of reasons, corporations and LLCs are often regarded as “better” choices. This article compares some of the key features of LLCs and corporations.

 

Historic Availability
Corporations have been available in all states for many decades. LLCs have been available in New Jersey since 1994. By comparison, LLCs are relative newcomers but are quickly becoming the “entity of choice.”

 

Pre-Creation Formalities
A corporation or LLC cannot exist under New Jersey law until a document creating the entity is filed with the appropriate state office. For a corporation, the creation document is a “Certificate of Incorporation” and for an LLC, the document is a “Certificate of Formation.”

 

Post-Creation Formalities
After creation, both corporations and LLCs must register with the state for tax and labor purposes. In addition, both corporations and LLCs must file annual reports and pay the related filing fee to maintain their existence. Corporations have additional post-creation formalities, including holding an organizational meeting of the directors to issue stock, adopt bylaws, elect officers and conduct other organizational business. Corporations must also hold annual shareholder meetings. LLCs are not required to formally organize after creation or have directors, officers, bylaws or annual member meetings.

 

Liability Shield
Both corporations and LLCs afford a liability shield. That is, owners of corporations (i.e. shareholders) and owners of LLCs (i.e. members) are not personally liable for the entity’s debts and obligations incurred in the normal course of business.

 

Income Taxation
As a general rule, LLCs are required to report income, but do not pay federal income tax. Income and losses flow through to members who then determine their individual tax obligations. Corporations are required to pay taxes on net income and, if profits are distributed to shareholders via dividends, the dividends are taxable income to the shareholders. Subject to certain ownership and management rules, small corporations may qualify for flow through tax treatment by electing “S” corporation status. An LLC can elect to be taxed as a corporation.

 

Transfer of Ownership
Corporate stock is freely transferable. By comparison, members of LLCs may freely transfer their right to receive profits from the LLC, but their right to participate in management is not, as a general rule, transferable.

There are numerous important differences between a corporations and an LLC. The entrepreneur should seek competent legal and tax advice before deciding how to structure his or her business. Please contact the author if you wish to discuss this article or his practice areas.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com

Shareholder Agreements

Shareholder Agreements

OWNERSHIP OF A CORPORATION is represented by shares of stock. Most of us are familiar with public corporations, for example— Microsoft, Ford, Coca Cola, etc. These corporations have large numbers of owners (i.e., stockholders or shareholders) and are referred to as public corporations because their stock is traded freely and openly through recognized exchanges and markets, such as the New York Stock Exchange and NASDAQ. Conversely, private corporation stock is not traded through recognized exchanges and markets, and private corporations are usually owned by a small number of stockholders (i.e., they are closely held).

Millions of small businesses are organized as corporations, primarily because corporations provide a liability shield. Owners of a corporation are generally not personally liable for the corporation’s debts and obligations. Even though small, private corporations are sometimes viewed as incorporated partnerships, most corporation laws apply equally to both public and private corporations. This can present special challenges for a small, private corporation. Many of these challenges can, and should be, anticipated and addressed in a Shareholder Agreement. The following highlights some critical issues shareholders of private corporations may wish to address.

Transferring Stock
Corporate stock is freely transferable— and whatever rights a shareholder possesses pass as a single “bundle” when stock is transferred. Obviously, this is a very favorable attribute for public corporation stock. Certainly, the average investor would not want the purchase or sale of Microsoft stock to be limited or restricted in any way. However, this presents a possible problem for a shareholder of a private corporation. Presumably, people join and form small businesses together because, on some level, perhaps subconsciously, they anticipate that they will pursue their business endeavors collectively and as a “unit.” A shareholder may be saddened to learn that her “partner” (perhaps one owning a controlling share of the corporation) just sold his stock and now she has a new “partner.” A Shareholder Agreement may be used to reasonably restrict a shareholder’s right to sell, give, assign or otherwise transfer his/her stock.

Marketing Stock
Paradoxically, a shareholder may be unable to transfer her stock because there is no active public trading market for private corporation stock. This can present a significant challenge when a shareholder actively involved in the corporation business dies, retires, resigns or otherwise wants to “withdraw” from the corporation. Generally, a shareholder may not “withdraw” from a corporation. That is to say, a corporation is not obligated to repurchase the stock. A Shareholder Agreement may be used to provide or facilitate a market for the stock.

Valuing Stock
Because public corporation stock is traded freely and openly through recognized exchanges and markets, the price of such stock is constantly updated and published. Stock of a private corporation is not frequently traded and the price is not published. This can present a challenge and result in costly disputes when it comes time to value the stock of a “departing” shareholder. Valuing a private corporation can require significant time, effort, and the assistance of financial professionals. A Shareholder Agreement can establish fair and objective valuation methods.

 

The foregoing are just a few of the challenges private corporations face. A well-drafted Shareholder Agreement can address these and other challenges, as well as avoid costly litigation. Please contact the author if you wish to discuss this article or his practice areas.

 

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com

Selling a Business Legal Aspects and Considerations

SELLING A BUSINESS is a major decision. Business owners typically wrestle with this question when they ponder retirement or wish to pursue different business opportunities and interests. This article highlights the legal aspects and potential pitfalls of various stages of the business sale process.

Sale vs. Dissolution
Rather than selling the company, a business owner could, of course, wind-up and dissolve the company. However, in doing so, the business owner will not be able to fully realize the value of the company’s goodwill. In essence, goodwill consists of a business’ reputation, patronage and other intangible assets. Typically, a successful business develops these attributes over a period of time. A buyer will benefit by acquiring a company with some level of “ready-made” business and, accordingly, the seller can demand a price “premium” for this additional value.

Preliminary Negotiations
The early stages of any business sale will entail some preliminary negotiations between the proposed buyer and seller. It is this stage where the parties will begin to explore the broad issues and characteristics of the transaction such as price, payment terms, and the legal structure of the sale (e.g. stock sale, asset sale, etc.). The parties typically converse and may exchange correspondence as well as other informal documents. It is here where the parties may unwittingly encounter their first legal land mine. There subtle differences between negotiation and words that give rise to a contract. If oral expressions are sufficiently definite as to the essential terms and demonstrates an intent to bound, a legally binding contract can arise, despite the fact that the parties planned to later formalize the agreement or address other issues in a written contract.

Letters of Intent
In some cases, a letter of intent (LOI) can facilitate negotiations. LOIs are often misunderstood and can represent significant legal risks. Many times, people wrongly view LOIs as documents that are “somewhat binding.” LOIs can have binding and/or nonbinding provisions— but there is no middle ground. LOIs must be drafted with care. If a purportedly “nonbinding” LOI is sufficiently definite as to the essential terms and demonstrate an intent to be bound, courts may construe it as a binding contract, despite the document being labeled “Letter of Intent.”

Due Diligence
Due diligence is the care and investigation undertaken to assess the legal, financial and market risks of a proposed transaction. Although due diligence is typically a greater concern to buyers, sellers may wish to investigate the financial wherewithal, experience, and credibility of a potential buyer.

Consulting and Employment Relationships
A seller may wish to offer, or the buyer may request, the seller’s business advice after the transaction closes. After all, a seller will have a wealth of knowledge about the company’s industry, customers, vendors, employees, landlord, lenders, etc. Of course, the seller is entitled to be compensated for conveying such advice. The seller should consider exploring either an independent contractor (i.e., consultant) relationship or a classic employment relationship with the buyer.

Collecting the Sale Price
A chief concern of the seller is, as it should be, getting paid. If the sale is an “all cash” deal, the seller has little concern in this regard. However, the buyer often lacks the capital needed for an “all cash” deal. In such cases, the buyer will typically ask the seller to allow some or all of the price to be paid over a period of time. At minimum, such agreements should be documented with appropriate loan agreements and promissory notes. The seller should consider additional measures to reduce risk. For example, the seller may want the buyer to offer “collateral” to secure the loan. If the buyer is a limited liability entity (e.g. corporation or LLC), the seller should ask the principals of the entity to personally guarantee payment. The seller should also consider requesting the personal guarantee of the principals’ spouses to avoid the dissipation of the principals’ assets through asset transfers (whether “legitimate” or fraudulent).

In conclusion, selling a business implicates numerous legal issues. Entrepreneurs will be well served by obtaining professional advice regarding such transactions. Please contact the author if you wish to discuss this article or his practice areas.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com

Selecting, Protecting and Using Business Names

CHOOSING A NAME FOR YOUR BUSINESS OR PRACTICE is an important matter. A business name can serve to inform potential customers or clients as to what goods or services you offer. With time, a business name will impart to customers and clients, as well as potential customers and clients, a level of quality and professionalism they can expect from you. So, it is no surprise that entrepreneurs should, and often do, carefully consider their choice of business names in the context of marketing and business development. However, in addition to marketing considerations, the selection, protection, and use of business names implicate legal issues entrepreneurs often overlook or misunderstand.

 
SELECTION

As a threshold matter, business names are governed by the law applicable to the legal structure of the business (e.g., sole proprietorships, general partnerships, limited partnership, limited liability partnerships, limited liability companies, and corporations). Generally, names for commercial businesses are subject to little regulation, but are usually required to follow the name with a designator which indicates its legal nature (e.g., Ltd., Corp., Inc., L.P., LLP, L.L.C., etc.). Names for professional practices (e.g., accountancy, engineering, dentistry, medicine, law, etc.) are more heavily regulated by applicable law and professional boards and agencies.

 
AVAILABILITY

Once the entrepreneur selects a “permissible” name, the entrepreneur must then determine whether the name is “available.” Normally, state commercial recording offices will not accept a formation, registration, or reservation document unless the selected name is distinguishable from other names appearing upon state records. If a business name is, in fact, “taken,” it is not difficult to select a distinguishable name. Often, minor variations of a “taken” name will suffice.

 
PROTECTION

The entrepreneur who selects a name that is both permissible and available, and successfully files a formation, registration, or reservation document often falls victim to a popular misconception that such a filing enables the entrepreneur to prevent others from using the name. Although state commercial recording offices may “accept” or “approve” a particular business name in the course of processing filings, such “acceptance” or “approval” does not authorize the use of that name in derogation of another party’s established right in the name. A proprietary “right” to use a business name and the right to preclude others from using the name, can arise from various laws. Most entrepreneurs are generally familiar with federal trademark registration. However, state trademark registration is also available. Even without registration of any kind, limited common law protection may arise through the use of the name in commerce or other legal theories.

 
USE

Although state commercial recording offices may “accept” or “approve” a particular business name in the course of processing filings, such “acceptance” or “approval” does not authorize the use of that name in derogation of another party’s established right in the name. Thus, even if a name is “available” for state commercial recording office purposes, it is important to conduct a diligent investigation to determine whether others have a “superior” right to use the chosen name.

In conclusion, the selection, protection and use of business names implicate important commercial and legal issues. Accordingly, entrepreneurs will be well served by giving careful consideration to these matters. Please contact the author if you wish to discuss this article or his practice areas.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com

Post-Creation Organization of Corporations

THERE ARE NUMEROUS LEGAL FORMALITIES associated with forming, organizing and operating a business corporation. To create a business corporation, a Certificate of Incorporation must be filed with the appropriate state office. In addition, the corporation must be formally “organized” after the incorporation. An organizational meeting is held by the initial board of directors to adopt bylaws and a corporate seal, elect officers, issue shares of stock, and transact such other important business. The timely completion of this important step may serve to “strengthen” the corporate liability shield and avoid later confusion or disputes concerning the ownership and management of the corporation.

Board of Directors
Generally, the business and affairs of a corporation must be managed by or under the direction of its board of directors. The initial board of directors must be identified on the Certificate of Incorporation.

Bylaws
Corporate bylaws are rules that govern the internal affairs of a corporation. To a large extent, bylaws define the governance structure, including the rights and responsibilities of stockholders and corporate managers and agents.

Officers
A corporation must have a president, secretary, and treasurer. The corporation can have other officers if provided for in its bylaws. A person may hold more than one office, but generally cannot execute, acknowledge, or verify an instrument as more than one officer at a time.

Shares of Stock
Ownership of a corporation is represented by shares of stock. The Certificate of Incorporation specifies the number of shares the corporation is authorized to issue, and shares should be issued to the initial stockholders at the organizational meeting.

Procedures for Organizational Meetings
New Jersey business corporation law sets forth procedural requirements for calling the organizational meeting, including matters such as advance notification and designation of the time and place of the meeting. It has become common practice to utilize a written, unanimous consent of the board of directors in lieu of a formal meeting. Whether by way of formal meeting or written, unanimous consent, corporation law requires this post-creation organization procedure.

Please contact the author if you wish to discuss this article or his practice areas.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com

Partnership Agreements

THE GENERAL PARTNERSHIP (“partnership”) form of business has existed for many years. In its simplest form, a partnership is an association of two or more individuals to operate a business for profit. All states have enacted partnership laws. New Jersey’s partnership law was significantly revised in 2000.

In absence of an agreement among the partners, partnership laws establish a set of “default rules” that will govern the internal affairs of the partnership. In almost all situations, the law allows partners to replace these rules by having a “partnership agreement.” Although partnership agreements are not usually required, it may be advisable to have one because the default rules may not adequately address, or be contrary to, the goals of the partners. Partnership agreements need not be written, but having a written partnership agreement will reduce the possibility costly misunderstandings. The following is a partial list of important internal affairs to consider.

OWNERSHIP & COMPENSATION

How will profits and losses be allocated?
Without a partnership agreement, a partner is entitled to an equal share of the partnership profits and is chargeable with a share of losses in proportion to the partner’s share of the profits.

How are new partners admitted to the partnership?
Without a partnership agreement, a person may become a partner only with the consent of all of the partners.

Can a partner be expelled from the partnership?
Without a partnership agreement, a partner can be expelled upon the unanimous vote of the other partners, but only in specific circumstances.

How will the partners be compensated for their services?
Without a partnership agreement, a partner is not entitled to remuneration for services performed for the partnership.

MANAGEMENT

Who has authority to bind the partnership?
Without a partnership agreement, each partner is an agent of the partnership for the purpose of its business (i.e., an act by a partner in the ordinary course of partnership business binds the partnership).

Who will manage the partnership?
Without a partnership agreement, each partner has equal rights in the management and conduct of the partnership business.

Who will make business decisions?
Without a partnership agreement, matters in the ordinary course of business will be controlled by a simple majority and acts outside the ordinary course of business will require unanimous consent of the partners.

EXIT STRATEGIES

May partnership interests be transferred to third parties?
Without a partnership agreement, a partnership interest is not freely transferrable.

What rights does a dissociating (e.g., withdrawing) partner have?
Without a partnership agreement, the partnership must cause the dissociated partner’s interest in the partnership to be purchased (i.e., “bought-out”).

In conclusion, partners should carefully consider how a partnership agreement can protect and advance their business goals and objectives. Also, it is important to note that a general partnership does not afford a liability shield— all partners are liable jointly and severally for all obligations of the partnership. Thus, partners may want to consider “converting” their partnership to a limited liability partnership or utilizing a different business structure.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com

Non-Compete Agreements

A NON-COMPETE AGREEMENT (a.k.a. restrictive covenant) in the employment context is a promise by an employee not to compete with his/her employer after the employment ends. This can be embodied within a broad employment agreement or be the only provision in a stand-alone agreement. Because non-compete agreements, by their very nature, restrain trade and negatively impact an employee’s ability to find subsequent employment, people are often under the false impression that such agreements are “illegal” or unenforceable.

As a general rule, they are legal and enforceable, provided that they are reasonable under the circumstances. A restrictive covenant is reasonable if it protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public. Furthermore, courts have the power to reform (i.e., modify) a restrictive covenant so that it is “reasonable” under the circumstances

 

Legitimate Interest
Legitimate interests of an employer include the preservation of customer relationships, trade secrets and confidential information. The mere desire to prevent an employee from future employment is not a legitimate interest.

 

Undue Hardship
A restrictive covenant will almost always impose some degree of hardship upon the employee. However, courts may enforce the covenant unless the hardship is undue. Courts will consider a number of factors when deciding whether a hardship is undue, including the impact on the employee’s ability to earn a livelihood, the geographic range of the limitation, and the duration of the restriction.

 

Injury to Public Interest
A restrictive covenant may be deemed to injure public interest if it deprives the public of vital services or creates monopolistic business practices that limits the availability of goods and services.

The topic of restrictive covenants is controversial and the law of restrictive covenants is very dynamic. Numerous New Jersey cases have examined restrictive covenants, but cases are fact-sensitive and decided on a case-by-case basis. Thus, very few, if any, bright-line rules have emerged. Please contact the author if you wish to discuss this article or his practice areas.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com

Limited Liability Partnerships

New Jersey’s partnership law has recognized limited liability partnerships (“LLPs”) for quite some time. However, as of December 2000, the partnership law was revised and the revision made LLPs an even more attractive alternative to the general partnership (“GP”) form of business. The following addresses frequently asked questions regarding GPs and LLPs.

 

What is a GP?
A general partnership (a.k.a. “partnership”) is an association of two or more persons who co-own and carry on a business for profit.

 

Is a filing of any kind necessary to create a GP?
No. The mere association of two or more persons to carry on the for-profit business creates the GP. However, as with all business structures, there are post-creation formalities associated with GPs.

 

What is an LLP?
An LLP is a partnership that has filed a Statement of Qualification with the appropriate state office.

 

Is a filing of a Statement of Qualification necessary to create an LLP?
Yes. A Statement of Qualification must be filed with the state to create an LLP.

 

Are there fees associated with creating and maintaining an LLP?
Yes. There is a one-time fee for filing a Statement of Qualification and, thereafter, there is an annual fee to maintain the existence of the LLP.

 

What is the chief advantage of an LLP?
The liability shield. In a GP, each and every partner is personally liable for all debts and obligations of the GP to the extent the GP’s assets are insufficient to satisfy the debts or obligations. An LLP shields its partners from personal liability for partnership debts and obligations incurred in the normal course of business.

 

What is the difference between an LLP and a limited partnership?
The availability of limited partnerships (“LPs”) pre-date modern LLPs. LPs are far more complex business structures than LLPs. LPs must have two classes of partners (i.e., limited and general). General partners possess full management control of the LP, but also face personal liability for the debts and obligations of the LP to the extent the LP’s assets are not sufficient to satisfy the debts or obligations. Normally, limited partners have little or no management control. At the same time, they have liability shield, but that shield can be disregarded if limited partners actively manage the partnership business.

 

Is an LLP always the best or only choice? No.
There is a variety of other business structures to choose from, including GPs, LPs, limited liability companies and corporations. The “best” choice will depend on numerous criteria including tax considerations, the owners’ risk tolerance and their willingness to perform post-creation business formalities.

It is prudent to seek the advice of a competent attorney and certified public account prior to establishing any business structure. Please contact the author if you wish to discuss this article or his practice areas.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com