Limited Liability Partnership
A Limited Liability Partnership is a comparatively new type of business structure created by the Limited Liability Partnerships Act 2000.
Net Lawman summary of provisions;
When to use a limited liability partnership;
LLP or company?
Animal, vegetable or mineral?
A limited liability partnership is a legal entity and a body corporate. That means it has a legal personality separate from that of its members. Like a limited company, a limited liability partnership can do all the things an individual or company can do. It can make contracts, sue or be sued, hold property or become insolvent. By and large, partnership law does not apply to a limited liability partnership, but the arrangements between the partners may closely follow a traditional partnership agreement. A limited liability partnership is not the same as a limited partnership, regulated by the Limited Partnerships Act 1907.
The contracting party
The limited liability partnership's existence as a corporate entity means that the effect of the general law is different in comparison with a partnership. For example, it is anticipated that a third party will usually contract with the limited liability partnership itself rather than with an individual member of the limited liability partnership whereas, in general, a partner contracts as principal and on behalf of the other partners.
Partners or employees?
Despite the similarity with a limited company, the partners in a limited liability partnership are not employees of the partnership, whereas the directors of a limited company are employees of the company. But beware salaried partners and other hybrid animals. If they would be an employee in a partnership, then they are an employee in the limited liability partnership.
Limitation of partner liability
The liability of members of a limited liability partnership, if it is wound up, is limited (compare with a partnership where the liability of the partners is unlimited). If a partner is negligent in work done for a client, there would generally be two possible causes of action against that partner: contract and tort. If the same work is contracted to a limited liability partnership, then on the face of it, no liability can falls to the partner who was negligent.
Specific professional rules may dictate otherwise. We note too, that the guidelines published as notes to the act presume that the partner may still be liable in negligence as a matter of law. If so, this would seem to defeat the purpose of the act. We take the view that a parallel should be drawn with the situation if an employee of a company is negligent. The important issue would then be as to whether the person concerned had assumed personal responsibility for the advice and whether the client had relied on that.
Who can be a partner?
There is nothing in the provisions to prevent a limited company being a partner. This opens up interesting possibilities for joint ventures and profit sharing. For example, in the claw back of tax losses, the partnership agreement could specify that the corporate partner should take the first 000 of profit, and a second partner the remainder. Similarly, in a property venture, the partners could allocate profit according to conditions and degrees of success.
Forming a limited liability partnership
There are precise provisions for registration of a limited liability partnership, which are not dissimilar for those for creating a new limited company. However, you cannot buy an "off the shelf" limited liability partnership as you can a limited company. The original documents have to be prepared with the names of the first set of "real" partners.
At least two people carrying on a lawful business with a view to profit must subscribe their names to a document called an "incorporation document". The incorporation document must be delivered to the Registrar of Companies at Companies House . A statement must also be delivered to the Registrar that there has been compliance with the requirement that at least two persons, associated for the purpose of carrying on a lawful business with a view to profit, have subscribed their names to the incorporation document. The statement must be made by a subscriber to the incorporation document or a solicitor engaged in the formation of the limited liability partnership.
The incorporation document must include this information:
The name of the limited liability partnership;
Whether the registered office is to be situated in England and Wales , (in Wales or in Scotland , the address of the registered office);
The name and address of the persons who are to be members on incorporation;
Whether some or all of the members are to be designated members.
Do you need a partnership agreement?
Partners in a limited liability partnership are not obliged to enter into a formal partnership agreement. In practice, however, they will almost certainly get together to decide on the structure and regulation of all aspects of their limited liability partnership, in just the same way as prospective partners in a traditional partnership.
The agreement they make is then binding on them after the limited liability partnership has been properly registered. The agreement itself is not registrable and so remains confidential. If there is no agreement, or the agreement is silent on an important point, then formal default provisions apply in much the same way as the application of the default provisions of the Partnership Act 1890. The default provisions of the Act are simple and straightforward.
Partner money subscribed:
The Act states that the amount subscribed by a member of a limited liability partnership is the amount of his contribution to the limited liability partnership capital, less money:
He has previously drawn out or taken back;
He draws out or receives back during a period of five years from the relevant date;
He is entitled to draw but does not draw;
He is entitled to seek from another partner.
Partner liability on insolvency / winding up
The amount of his liability on a winding up is effectively the amount set out in the limited liability partnership agreement. In most cases the greater amount referred to of these two alternatives will be the first set, namely the amount the partner has put in, together with the net amount he has drawn for the last five years.
What is a designated member of the partnership?
Designated partner status is central to the legislation and should be followed carefully. A designated member is either an original member, or someone who is notified to the registrar as being a designated member subsequently. The limited liability partnership may give notice to the registrar that every partner, and future partner is, or shall be a designated member. However, a person ceases to be a designated member as soon as he stops being a partner. A designated member is responsible for certain administrative and filing duties and for the filing of accounts as well as other duties in particular circumstances.
Specifically, it is the designated partners who are held liable for the correct filing and recording of the limited liability partnership affairs. It is they too, who will be subject to the criminal penalties of failure to comply.
Who are designated members?
In small partnerships, it is likely that all partners will be designated partners. In any event there must be at least two designated partners. The partners may specify in the incorporation document that every partner is a designated member. If so, then from that time all persons who are from time to time members are designated members. Alternatively the same notification can be made later to the registrar, to the same effect. This saves notifying the registrar of the change when a designated partner leaves or joins the partnership.
Notification and penalties
The partnership must notify the registrar:
Of the appointment or retirement of a member or designated member within fourteen days;
Of a change in the name or address of a member, within twenty eight days.
Failure to comply with the filing provision carries liability to a fine of up to 5,000.
Transactions with third parties
The law of ostensible authority applies to partner transactions. Every partner is an agent of the limited liability partnership. The limited liability partnership is bound by every contract made by any partner, unless first, the partner had no authority to make the contract and second, the third party was aware of that fact. The limited liability partnership is bound even by contracts by former partners, unless the other party has been told that the former partner is no longer a member, or the registrar has received a notice to that effect.
Much of this short Act is taken with amendments to the Income and Corporation Taxes Act 1988. The profits of the business of a limited liability partnership are taxed as if the business were carried on by partners in partnership, rather than by a body corporate. This ensures that the commercial choice between using a limited liability partnership or a partnership is a tax neutral one. There are fair and foreseeable provisions to restrict set off of losses elsewhere against partnership profits of a partner and other anti-avoidance measures.
Capital Gains Tax
The members of a limited liability partnership are charged to Capital Gains Tax in largely the same way as traditional partners in a partnership. Neither the commencement of the limited liability partnership, nor any change of partner is treated as an event giving rise to a charge to Capital Gains Tax.
The Inheritance Tax Act 1984 has been amended to provide that the partners and partnership assets of a limited liability partnership are treated in largely the same way as those of a traditional partnership.
Subject to certain rather complicated exceptions, stamp duty is not chargeable on a transfer of property of any sort into or out of the partnership, provided the transfer does not have the effect of changing the entitlement to the value of that property of the person transferring it. In other words, you can transfer your property to the partnership without stamp duty penalty provided your partnership agreement still entitles you to the value of it or you receive cash to that value.
Business coming into the limited liability partnership
The transfer of an existing business to a limited liability partnership will not be treated for tax purposes as a cessation of the business of the partnership which is making the transfer unless in identical circumstances a transfer between one partnership and another would do so.
Remember the regulations
The Act anticipates future regulations (now in place) which apply the provisions of company law and insolvency law, with appropriate modifications, to limited liability partnerships. These regulations provide safeguards for those dealing with limited liability partnerships. They include provisions for public disclosure of financial information about limited liability partnerships and for insolvency procedures.
When to use a limited liability partnership
Of all the legislation of the last few years, the creation of limited liability partnerships is one of the most interesting:
Limited liability generally the essence of a limited liability partnership for practical purposes is as a vehicle to contain a partnership of any size where partners may be at risk from the careless or accidental negligence of a colleague. For example, partners in International accountancy firms would be protected from personal liability if a claim was successfully pursued by a major client. Partners in a construction business would be protected if a new building collapsed, causing high level claims against them;
Protection for a non-active lender a limited liability partnership may also be appropriate for a partnership where some partners are not actively involved. They might have once been called sleeping partners. This will suit both a company and an individual lender;
Easy in, easy out the LLP structure is more suitable for a group of people engaging together in a property or finance venture where it may be necessary to account for partners coming ang and going more frequently than you would expect in a normal partnership business.
LLP or company?
A limited liability partnership is unlikely to be useful for a small trading company of any sort because a conventional limited company is likely to perform an appropriate role at less cost.
The benefits of a limited liability partnership against a limited company may be:
Less public scrutiny because the partnership agreement remains confidential;
Easier manipulation of shares between partners;
Easier changes of membership;
No administration relating to the issue and allotment of shares;
Easier expression of administration, roles and management in a partnership agreement.
The disadvantages may be:
Lack of certainty as to how the Registrar and the courts will treat limited liability partnerships;
Lack of a body of law to protect minorities;
Possibly more fuss&rdquo
by: Miriam TaylorAbout the Author:Net Lawman Ltd is an English company operated by Andrew R. Taylor. Most legal work is undertaken by Rajeev Goswami assisted by English barristers. Following are the relevant resources: limited liability partnership, limited liability agreementFor more infor