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United Kingdom

The Limited Liability Partnerships Act 2001 came into force on April 6 2001, enabling limited liability partnerships (LLPs) to be incorporated from that date. These partnerships have many of the characteristics of limited liability companies and adopt some of the principles of partnership law. This article discusses some of the important distinctions between LLPs and: (i) limited partnerships under the Limited Partnerships Act 1907; and (ii) limited liability companies incorporated under the Companies Act 1985.

Separate legal personality

As with a company, a limited liability partnership has separate legal personality, which means that it has its own assets and liabilities distinct from its members. A limited partnership is not a legal entity which means that the partners hold property and incur liabilities in their own name.

Nature of limited liability

Members of an LLP enjoy limited liability provided that they have not assumed a duty of care for which they could be liable in negligence.

The new regulations also include claw-back provisions which require any member who withdrew any property from the LLP within two years before the winding-up of an LLP to make a contribution to the LLP up to the amounts withdrawn if:

  1. the member knew or had reasonable grounds for believing that the LLP was insolvent or would become insolvent as a result of that withdrawal and any other withdrawals occurring in contemplation at that time; and
  2. the member knew or ought to have concluded that after each withdrawal there was no reasonable prospect that the LLP would avoid going into insolvent liquidation.

A member is deemed to have the general knowledge and experience which could be reasonably expected of a person carrying out the same functions as are carried out by that member, and the general knowledge and experience that the member has. These provisions are therefore similar in concept to the wrongful trading provisions contained in The Insolvency Act 1986 which apply to limited liability companies although it remains to be seen whether the same case law will be applied. The claw-back provisions for LLPs are potentially more far reaching because they apply to all members, whereas the wrongful trading provision only imposes personal liability on directors.

In the case of a limited partnership, the claw-back provisions are also different. A limited partner who withdraws his or her contribution during the life of the partnership is liable for all the debts and obligations of the firm up to the amount so drawn out or so received back. This applies regardless of the knowledge or skills of the partner concerned and without limit in point of time.

Constitution

There is no limit on the number of partners who can form an LLP. With a limited partnership, the number must not exceed 20 unless a professional partnership is being formed. In the case of a company, there is no limit on the number of shareholders.

An LLP must also have at least two members who are called designated members: they have special responsibilities primarily relating to audit. These two members have many of the characteristics of directors in that they are under a statutory duty and are subject to disqualification proceedings for breach of that duty.

Management

All members of an LLP can participate in the management of a limited liability partnership and still retain the benefits of limited liability. This is to be contrasted with a limited partnership where a clear distinction is drawn between a general partner, who is liable without limit for the debts of the firm, and limited partners, whose liability is limited to the amount contributed provided that they do not take part in the management of the partnership, in which case their liability becomes unlimited.

With a limited company, a clear distinction is drawn between the role of directors and shareholders, and both should be protected from the consequences of the company's underlying insolvency unless a breach of fiduciary duties can be established.

Flexibility

For both LLPs and limited partnerships the obligations of members to contribute to the partnership and the partnership's ability to return capital or income to its members is regulated solely by a partnership agreement. An LLP is therefore not subject to the stringent conditions attached to a limited company's ability to return capital and pay dividends to shareholders, and therefore provides considerable flexibility as an investment vehicle.

Disclosure and publicity

An LLP is required to file public records which include details of its partners as well as its annual accounts. A limited partnership is not required to file annual accounts, although there must still be public disclosure of its partners. Neither an LLP nor a limited partnership is required to file its partnership agreement.

With a limited company, there are detailed and continuing disclosure requirements that include publication of the annual accounts.

Business purpose

An LLP can only be formed where two or more persons come together for the purposes of carrying on a lawful business with a view to profit. It will therefore not be appropriate as a vehicle for non-profit making activities. A similar test must be satisfied for limited partnerships. Limited companies can, however, be formed for non-profit making purposes.

Conclusion

An LLP, although originally intended for professional partnerships, could also have many applications as an investment vehicle. It has many advantages over a limited partnership, in particular the lack of any upper limit on the number of partners, and the ability of partners to participate in the management of the entity without loss of limited liability. Its disadvantage over a limited partnership is primarily the increased levels of public disclosure and in particular the requirement to file audited accounts. The flexibility it offers in terms of contributions and withdrawal of capital and income also place it at an advantage over a limited company. It remains to be seen to what extent this new vehicle will become widely used, but it should provide a very useful addition to the range of available incorporated structures.

Sarah Holmes

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