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Limited Liability Partnership Advantages & Disadvantages

Limited liability partnership advantages & disadvantages

LLP Advantages & Disadvantages

British limited liability partnerships (LLP) is an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. It has both corporate and partnership characteristics. Despite the advantages of a partnership, the unlimited nature of partners' liability in an increasingly litigious world has prompted the arrival of limited liability partnerships.

The LLP is a type of business vehicle which is new to the United Kingdom, although it is well established in the USA and has been available under legislation in Jersey since 1996.

First, since aggrieved creditors or investors of a failed limited liability partnership may seek redress against the LLP's members or its auditors, it was felt by many in the audit profession that they, who are likely to carry substantial professional indemnity insurance, were being specifically targeted by litigants regardless of the level of their fault for the loss claimed. The cost to firms of defending actions rose sharply in the decade as did the cost of insurance. Secondly, under English and Scottish partnership law, each partner is jointly and severally responsible for the liabilities of the firm.

In the light of the increasing level of risk, it became harder for many in the larger firms to reconcile their firms' increasing size and specialization with the traditional partnership structure, in which all partners are experts of each other. Many felt that to require each partner in a large, highly specialised firm to accept unlimited financial responsibility for the actions of his or her partners had become an unrealistic proposition. It was speculated that, given the huge sums which were increasingly involved in negligence claims, the continuing exposure of partners to joint and several liability could deter the most talented young accountants from entering the audit profession. Were this fear to be realised, it could, in the long term, damage the quality of UK auditing and, in turn, the whole of the financial services sector.

Towards the end of 1996, the then President of the Board of Trade, following concerted lobbying by large audit firms, committed the government to bringing in a law to establish the LLP as a means of addressing these concerns. On the change of government in May 1997, the incoming Labour administration adopted this plan and the work on drafting LLP legislation continued without interruption. There has been extensive consultation with interested parties during the drafting process. The most important change which resulted from the consultation was to abandon the government's original plan to restrict access to the LLP structure to large, regulated, professional firms.

The presumption behind this proposed restriction was that, since it was the large, professional firms that had lobbied hard for the creation of the LLP, only firms in that sector needed to be considered as possible adopters of the new vehicle. It soon became apparent, however, that it would be unfair and restrictive to limit access to the new legal entity to firms with more than twenty partners and firms that conducted a particular line of business. It was, accordingly, agreed that the right to set up an LLP should be extended to firms of all sizes and which carried on business of any lawful type.

An LLP is a corporate entity with its own separate and distinct legal existence, like a company. It is the LLP, which enters into legal agreements, not the individual members. For taxation purposes, the members (and not the LLP) are treated as if they were carrying-on the business personally and taxed as self-employed. They are also treated as owning the assets of the business personally. A limited liability partnership may be formed by two or more persons (individuals or companies, and not necessarily United Kingdom resident) to carry-on a trade or business.

To form an LLP, the partners have to file an incorporation document at Companies House. The owners and managers of an LLP are the same. The LLP management structure and relationship between the partners are a matter for agreement between them and may be recorded in a separate LLP agreement, similar to a partnership agreement.

LLP's Advantages

LLP incorporation benefits: no personal liability on a member for the LLP's debts and contracts, no joint and several liabilities for the negligence of any member. Members' liability to contribute in a winding-up is limited to the amount they agree to contribute in the event of a winding-up as recorded in the LLP agreement. The limited liability partnership is a registered United Kingdom entity, which obtains a certificate of registration and a registration number from the Companies Registrar of England and Wales or Scotland.

A limited liability partnership registered in the Great Britain is not itself liable to UK tax (unlike a limited company). If any partner is non-United Kingdom resident, then non-UK source income of the partnership is not taxable in the United Kingdom. If the management and control of the partnership is situated overseas, and the trade is carried on abroad, UK resident but non-domiciled partners will likewise not be liable to United Kingdom tax on partnership profits. United Kingdom limited liability partnership has fewer compliance and disclosure requirements than UK companies.

LLP's Registration Disadvantages

Disclosure information (in particular accounts and an auditors' report) must be filed with the Registrar of Companies and becomes public. Regulation: auditing and filing requirements.

The key advantage of a LLP compared with a traditional partnership is that the members of the United Kingdom Limited Liability Partnership (it is very important that they should not be called partners but members) are able to limit their personal liability if something goes wrong with the business, in much the same way as shareholders in a company have always been able to do. Of course anyone lending money to the LLP such as a bank may still require personal guarantees from the members, as they frequently do with shareholders in a company.

Where business owners have wanted to limit their personal liability in the past, they have normally set up companies and any profits made by those companies are subject to corporation tax. Dividends paid by the companies can then be taken as income of the shareholders. LLPs are taxed quite differently in that the profits are treated as the personal income of the members as if they had run their business as a partnership. The taxation of companies and partnerships is very different but taxation should not be the main consideration in choosing a business vehicle.

English limited liability partnerships will produce and publish financial accounts with a similar level of detail to a similar sized limited company and will have to submit accounts and an annual return to the Registrar of Companies each year. This publication requirement is far more demanding than the position for normal partnerships and some specific accounting rules may lead to different profits from those of a normal partnership.

UK Limited Liability Partnership Corporate Characteristics

Corporate characteristics:

  • An LLP is a body corporate, a legal entity in its own right with its own assets and liabilities, separate from its members
  • An LLP members have limited liability in the same way that shareholders have in limited liability companies
  • Contractual arrangements bind the LLP not the members, and in the event of negligence or other torts by other members (or employees) are not jointly or directly liable
  • Members may be liable for their own negligence or other torts like company directors if claimants can show they entered into arrangements relying personally on the member as well as the LLP
  • Suitably worded engagement letters may be able to control such exposure
  • Third parties can assume members are authorised to act on behalf of the LLP and a member is still a member unless the third party has had notice or notice been delivered to the Companies Registrar
  • Floating charges can be created on the LLP
  • LLPs must file accounts at Companies House showing a "true and fair view" according to generally accepted accounting standards
  • No restriction on partner numbers

The provisions of the Companies Act and the Insolvency Act apply to LLPs in the same way as for limited companies. For instance: the rules concerning fraudulent and wrongful trading, disqualification of directors and insolvency and winding-up procedures.

UK Registered Limited Liability Partnership is not an Ordinary LLP Partnership

An LLP is a new species of company, with 'members' and a constitution. The LLP needs to be registered at Companies House like a limited company, owns assets and contracts with the outside world in its own right.

But there are numerous differences between an LLP and a limited company formation. It is not bound by the wide range of management requirements, arrangements for meetings, voting rights and so on that apply to a company: the members can draft a constitution which is simpler and suits the way the business actually works. LLPs are not obliged to have directors and all members can take part in management unless they agree otherwise. Like a partnership, all members are experts of the LLP and when a member leaves a simple notice filed at Companies House it is notice to all the world that he or she is no longer a member.

LLPs are obliged to file returns and at least one member has to be 'designated' as the person responsible for the filing requirements - like a company secretary. As with companies, LLPs have to file accounts, which must be audited, subject to the same exemptions as apply to small companies and disclosure has to include the amount of profits attributable to the highest paid member and the home addresses of members. There have been some concerns expressed at these last two requirements.