NEW YORK COUNTY LAWYER’S ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 703
TOPIC: PROFESSIONAL CORPORATION, “PC”; LIMITED LIABILITY COMPANY, “LLC”; LIMITED LIABILITY PARTNERSHIP
DIGEST: A LAW FIRM MAY BE STRUCTURED AS A PROFESSIONAL CORPORATION (“PC”), A LIMITED LIABILITY COMPANY (“LLC”), OR A LIMITED LIABILITY PARTNERSHIP (“LLP”). THE USE OF THE TERM “PC”, “LLC” OR “LLP”, WITHOUT MORE, IN A LAW FIRM’S NAME PROVIDES ADEQUATE NOTICE TO CLIENTS OF THE LIMITATION OF THE MEMBERS’ LIABILITY.
CODE: DR 2-102(B) , (C) ; DR 6-102 (A).
A New York law firm that is a general partnership seeks to obtain the benefits of the statutory limitation on malpractice as well as other tort and contract liability afforded by status as a (a) professional corporation (“PC”); (b) professional service limited liability company (“LLC”), or (c) limited liability partnership (“LLP”). Similarly, a non-New York law firm which obtained such protection pursuant to non-New York law seeks to practice in New York as a PC, LLC or LLP. Is there any ethical objection to the practice of law in New York in any of these forms by either the New York law firm or the non-New York law firm?
New York law has long provided (in section 1505 of the Business Corporation Law) that by practicing in a PC lawyers limit, in certain respects, malpractice liability in excess of the assets of the firm. The liability on a claim (in excess of firm assets) is limited to those who have done or supervised and controlled the work giving rise to it. N.Y. Business Corporation Law § 1505(a) (McKinney 1984). In addition, corporate status confers an automatic limit on liabilities (tort as well as contract) other than malpractice. Recently, New York has enacted a law permitting use of Limited Liability Companies (N.Y. Limited Liability Company Law) and Limited Liability Partnerships (Partnership Law Article 8-B) by professionals. Both the LLC and the LLP provide limits on liability substantially equivalent to the PC.
Thus, whether lawyers choose to practice in the form of a general partnership, a PC, an LLC or an LLP, if there is a malpractice claim, all of the firm assets (including insurance, if any) remain available to satisfy the claim. The critical difference between the forms arises if the firm assets are exhausted. In such event, if a general partnership is involved, all of the personal assets of every partner are available to satisfy the claim. In the general partnership context no distinction is made between the partners who committed (or supervised) the act giving rise to liability and the other partners. The liability of the partners not involved in or supervising the work giving rise to the claim is referred to as “vicarious liability.” However, if a PC, LLC or LLP is involved, only the assets of the lawyers involved in or supervising the acts giving rise to the claim are available to the claimant.
DR 6-102 (A) of the Lawyers Code of Professional Responsibility as in effect in New York (the “Code”) provides that
“A lawyer shall not seek, by contract or other means, to limit prospectively the lawyer’s individual liability to a client for malpractice, . . . .”
It follows that a lawyer may not practice in a manner which is designed to avoid individual responsibility for malpractice. Since most lawyers practice as partners, vicarious liability has been the norm. However, there is no ethical requirement that a lawyer’s partner be made vicariously liable for malpractice. Vicarious liability is merely a by-product of use of the general partnership form rather than an ethical requirement in New York.
Since the ethical concern is compliance with DR 6-102(A), it is necessary to examine whether the liability limitations contained in the New York statutes relating to the PC, LLC and LLP statutes are consistent with DR 6-102(A).
Article 15 of the N.Y. Business Corporation Law (“BCL”) relates to “Professional Service Corporations.” These are entities specifically created under Article 15 and which relate only to corporations organized for pecuniary profit. Article 15 corporations are exceptions to the general prohibitions in section 495 of the Judiciary Law against corporations practicing law. See N.Y. Judiciary Law § 495(6) (McKinney 1984).
Under section 1505 of the BCL, each “shareholder, employee or agent” of a PC is held “personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or by any person under direct supervision and control while rendering professional services.” Such a standard is in accordance with the requirements of DR 6-102 (A) that a lawyer may not prospectively limit individual liability to a client for malpractice.
Substantially similar provisions relate to foreign PC’s which may qualify in New York. See N.Y. BCL § 1527.
LLP’s and LLC’s utilized by law firms are subject to substantially similar provisions, whether governed by New York law or under foreign law, but qualified in New York. As to LLC’s see § 1205; as to foreign LLC’s see § 1303; as to LLP’s see § 26(b) and (c) of the Partnership Law; as to foreign LLP’s see N.Y. BCL § 1502 (1).
DR 2-102(C) of the Code provides that a lawyer shall not hold himself or herself out as a partnership with one or more other lawyers unless they are in fact partners. While DR 2- 102(B) refers to PC’s, it does not refer to LLC’s or LLP’s. They did not exist in New York when the Code was adopted. Thus, we do not regard DR 2-102(0 as prohibitive of either an LLP (in which the partnership arrangement remains) or an LLC, in which there is no partnership.
There is a danger that an LLC or an LLP will be confused with a general partnership (that is not registered as an LLP) unless there is some notice used as part of the firm name to distinguish these entities. In some jurisdictions, including New York, the statute requires that “LLC” or “LLP”, or some similar designation, must be added to the firm name in order to operate as an LLC or LLP. However, the question presented here is whether such a brief notation will adequately notify clients of the limitation on liability comprehended by the notation. In some jurisdictions, as an ethical requirement, words such as “a professional limited liability company” or “a limited liability partnership” must be used in addition to the LLC or LLP in the name. We believe that because the limitation on liability offered by the “LLC” and “LLP” go no further than the PC limitation, no notice other than the use of “LLC” or “LLP”, as appropriate, is required. We note that DR 2-102(B) recognizes the use of “PC”.
Thus, provided there is statutory compliance, it is our opinion that operation of law firms as PC’s, LLC’s or LLP’s in New York, whether foreign or domestic, complies with DR 6-102(A) of the Code and does not, by itself, create other ethical problems.
Lawyers are reminded that ethical requirements in other jurisdictions of practice must be met as to practice there. Thus, even if New York permits the use of “LLP” and no more, a more stringent rule in another jurisdiction may apply to practice there. See, for example, District of Columbia Bar Opinion No. 235 (1993), requiring that the words “registered limited liability partnership”, rather than LLP, be appended to the firm name.
A law firm may be structured as a professional corporation (PC), a limited liability company (LLC), or a limited liability partnership (LLP) without, by its structure alone, violating any ethical standard. The use of the term “PC”, “LLC” or “LLP”, without more, in a law firm’s name provides adequate notice to clients of the limitation of the members’ liability.
November 8, 1994
We have assumed compliance with any applicable statutes requiring qualification to do business in New York.