Professional organizations in Rhode Island are no longer excluded from becoming a limited liability company or partnership.
A new law, which took effect last week, has removed prior restrictions on the kinds of businesses that can qualify as either an LLP or LLC. Accountants, architects, dentists and doctors were among a laundry list of professions previously prohibited from forming LLPs or LLCs.
An LLP is a form of partnership that provides an individual partner protection against personal liability for certain partnership obligations. An LLC combines the corporate advantage of limited liability with taxation advantages associated with the partnership.
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The new regulation, approved by the House and Senate this year, is an amendment to legislation passed in 1992.
”This is important because it gives greater flexibility to business,” said Rep. Fausto C. Anguilla, a Democrat from Bristol who sponsored the legislation. “This was an artificial barrier that was not serving any purpose. It in no way lessens the regulatory oversight, and or other ethical requirements for specific professions. It simply makes us a little more business friendly.”
Providence lawyer Gordon Carpenter, who helped craft the legislation, said many Rhode Island companies have been eligible for LLC status since 1992, but professional organizations like dentists, doctors, and engineers have not been.
”The original legislation was passed during the DEPCO (Depositors Economic Protection Corporation) period and we made a strategic decision not to permit professional organizations,” he said. “At the time it was the right strategic decision because of the political atmosphere. It’s now nine years later and we have just made it.”
Ironically the new codes took effect just days before President Bush signed into law what some are calling the most far-reaching government crackdown on business fraud since the post-Depression era.
Carpenter said the two are far from related.
”An LLC will never forgive a professional from his or her own malpractice,” he said. “There is no down side to this. Every lawyer, accountant, dentist, and architect is responsible for his or her own actions. The only difference is what terms you as a businessperson do your business under. It basically comes down to tax purposes.”
Peri Ann Aptaker, director of financial planning for the accounting firm of Kahn Litwin, Renza & Co. in Providence agreed.
”Professionals are licensed by the state and they can’t protect themselves from liability,” she said. “There is a separate statute that these professional organizations go under, and they are regulated by the state. This just gives them a little more flexibility in the tax law.”
According to Aptaker most of the companies that do apply for LLC save money because it eliminates double taxation – a system of taxing earnings at the corporate level and then at the stockholder level.
”It basically affects tax planning,” she said. “It simply provides a tax advantage.”
All agree that the changes, though not expected to have a dramatic impact on current businesses in the state, could be good for future business.
”I am not sure how many businesses will actually convert,” Aptaker said. “But I see this having a much bigger impact on new business formations.”
Anguilla agreed.
”What we are trying to do is become more efficient,” he said. “We want to make it easier for people going out there to form that business, prosper at those businesses, and make our economy stronger.”
