ARE WULPA LIMITED PARTNERSHIPS THE NEW LLC IN 2010?

Back in October of 2009, I published an article on the myriad of problems plaguing Washington LLCs, many of which arose out of uncertainty, inconsistencies and gaps in the Washington Limited Liability Company Act (the “LLC Act”).

That same month, my colleague, Joe Campos, published an article on the then up-coming Washington Uniform Limited Partnership Act (“WULPA”), which on January 1, 2010, completely changed the landscape of Washington limited partnerships.

Over the holidays, I had some free time to take my mind off of client-specific projects and take a step back to look at the big picture. I was thinking about what the practice of corporate and securities law might bring in the new year, when, like a Christmas miracle, it hit me:

I no longer need to warn my clients about the problems with Washington LLCs while helplessly waiting for the Washington Legislature to fix the LLC Act. Without necessarily intending to, the legislature has, through WULPA, provided inviting new alternatives to the popular, yet problematic LLC.

In other words, if you own or do business as a Washington LLC, you should strongly consider reorganizing as a WULPA limited partnership or limited liability limited partnership.

Why? Here are four good reasons:

First, in making a switch from a Washington LLC to a WULPA limited partnership, you’re not going to have to actually change much about your business structure. A WULPA limited partnership or the new limited liability limited partnership will give most LLC owners the same basic structure and flexibility that initially attracted them to the LLC structure: (1) an entity with separate legal existence from its owners; (2) pass-through taxation; (3) limited liability for owners; (4) a relatively flexible internal governance structure; (5) unlimited flexibility in terms of issuing authorized securities; and (6) and the ability to individually tailor the rules governing internal relationships among the owners and operators of the entity to meet their specific business purposes through a central agreement, that being either the LLC’s operating agreement, or the limited partnership’s partnership agreement. In fact, a WULPA limited partnership essentially provides everything people like about LLCs, and more.

Second, WULPA is largely free of the inconsistencies and uncertainties recently exposed in the LLC Act by Substitute House Bill 1592 and the Washington Supreme Court’s May 14, 2009 decision in Chadwick Farms Owners Association v. FHC, LLC.

Specifically, WULPA avoids the confusion embedded in the LLC Act surrounding claims against an LLC in the critical context of dissolution, winding up and the ultimate death of the entity. As I mentioned in my previous article, the survival provision of RCW 25.15.303 allows for claims to be brought against a Washington LLC for three years after the date of dissolution. However, where a certificate of cancellation is filed prior to the expiration of the three-year survival period, the Chadwick ruling instructs courts to disregard the survival period. Moreover, depending on the form of dissolution (judicial, administrative or elective), the LLC may automatically be canceled short of the three year survival period.

In other words, one provision of the LLC Act accidentally and nonsensically takes away the assurances that another provision offers. The Washington Supreme Court notes that great injustice may be done by an inconsistent and contradictory LLC Act in severe need of revision. Unfortunately, Substitute House Bill 1592 only exacerbated the problems highlighted by Chadwick, leaving one to wonder whether any future revisions to the LLC Act will actually provide solutions or create new problems.

In contrast, WULPA provisions allow dissolved limited partnerships to dispose of claims in much the same way as dissolved corporations do under the Washington Business Corporations Act; cleanly with effective certainty. With respect to known claims, the claimants have 90 days from notice of dissolution to file a claim or else the claim is barred. To handle unknown claims, a limited partnership can publish notice of its dissolution and claims will be barred unless they are brought within 3 years of the notice publication date. Given the critical nature of the dissolution and winding up periods to the liability of the owners of the entity, the clarity provided by WULPA is a welcome contrast to the murky complexities of the LLC Act.

Third, WULPA makes clear the relationships between the statutes and the limited partnership agreement, as well as among general and limited partners. This clarity is a refreshing contrast to the uncertainty found in the connections between the LLC Act and the LLC operating agreement, and in the relationships among the managers, members and member-managers of an LLC.

WULPA makes it clear that general partners owe limited partners the twin fiduciary duties of loyalty and care, as well as the obligation of good faith and fair dealing. Limited partners owe one another no fiduciary duties whatsoever. This clear statutory statement is far preferable to the common law standards for LLCs found in the combination of multi-state case law: primarily Bay Center Apartments Owner, LLC v. Emery Bay, LLC, a case out of the Delaware Court of Chancery, and Bishop of Victoria v. Finely, a 2007 case out of the Washington Court of Appeals, which holds that members of Washington LLCs do owe one another certain fiduciary obligations.

The clarity regarding fiduciary duties is just one example of how WULPA speaks to issues where the LLC Act is silent. A few times over the past year, I’ve given a presentation called “Liability in the Limited Liability Company Context,” in which, among other things, I discuss the uncertainty created by the gaping holes in Washington’s LLC Act and the lack of applicable case law to fill the void. While the LLC Act is simply silent on many topics covered in great length in the Washington Business Corporation Act, WULPA frequently is not. To state it bluntly: where the LLC Act is silent, uncertain or inconsistent, WULPA is clear, certain and consistent. The ability to default to a more complete and thoughtful statutory regime is important to owners and operators of limited partnerships or LLCs where they encounter real-world issues that have not been addressed within their limited partnership agreement or operating agreement, as is most often the case.

Completeness, consistency and certainty are not the only benefits of reorganizing a Washington LLC into a WULPA limited partnership. There is a fourth major reason: improved liability protection. Under WULPA, limited partners now enjoy more protection from liability than they did before. Limited partners can no longer be held liable for partnership debts even where the limited partner participates in the management and control of the limited partnership. Additionally, under WULPA, a limited partnership can elect to become a limited liability limited partnership and provide a liability shield to its general partners. This means that general partners do not have to be exposed to liability for the debts of the limited partnership; a drastic change in the law that makes limited liability limited partnerships very appealing to business owners and operators who previously may have chosen the LLC over the limited partnership to avoid such exposure.

In closing, a WULPA limited partnership or limited liability limited partnership effectively provides LLC owners and operators a chance to keep all the elements of an LLC that appealed to them at formation, but gain clarity and certainty from the law governing their entities. Given the problems with the LLC Act and the lack of LLC case law to fill the void, WULPA limited partnerships are a better legal entity for doing business than the much-maligned yet ever-popular Washington LLC. Where the Washington legislature fell short on the LLC Act, it has found some redemption with WULPA.

In the parlance of our times, I would love to be able to say that “WULPA limited partnership is the new Washington LLC.” However, to say that would be to completely ignore the superiority of a WULPA limited partnership. If you own or operate a Washington LLC, the arrival of the new year is the perfect time to resolve yourself to be a better entity. A WULPA limited partnership could be the right choice for you.