- The LLP Arrives in the UK: An Introduction to the Limited Liability Partnerships Act 2000
- May 7, 2003
- Law Firm: Buchanan Ingersoll, Professional Corporation - Pittsburgh Office
From 6 April 2001 a new legal entity will be available in Great Britain: the limited liability partnership ("LLP"). This has been introduced by the Limited Liability Partnerships Act 2000 (the "Act"). The Act itself is relatively short (19 sections) but there are implementing regulations which run to 117 pages.
The background to the Act was the concern of large professional partnerships such as accountants, solicitors and architects to have the benefit of limited liability status in their practices rather than having to practice as partnerships and so face potentially large negligence claims for which they would be personally liable even though they may have had no personal involvement in the matter giving rise to the claim. However, the new form of legal entity may have wider applications.
The first point to note about an LLP is that it is not a partnership. Section 1 of the Act states that an LLP is a body corporate and that partnership law does not apply to LLPs except as specifically provided in the Act.
Implications of Body Corporate Status
Whilst a general partnership is permitted to carry out certain actions in its name, an LLP is a separate legal entity for all purposes. The LLP owns the assets of the business and, in conducting the business of an LLP, its members are agents of the LLP, similar to directors acting as agents of a company. This contrasts with partners who are agents of each other rather than of the partnership.
The Regulations apply a significant part of English company law with appropriate modifications, including as to publication of accounts, execution of documents, company names and publicity, auditors' appointment, registration of charges and insolvency and winding-up procedures. It is to be noted that, although the minority protection provisions of Section 459 Companies Act 1985 apply to LLPs, the provisions can be excluded by unanimous agreement of the LLP members.
An LLP can be formed by delivering to the Registrar of Companies an incorporation document, stating the name of the LLP, the registered office and the initial members. You must have at least two members of an LLP -- there is no equivalent to the provision which allows single-member private limited companies. A member may be nominated as the "designated member" who bears responsibility for many of the administrative functions of the LLP; otherwise all members bear the responsibility.
In the absence of any specific agreement, the Regulations provide that all members are to share equally in the LLP's capital and profits and unanimous agreement of the members is required in order to admit new members, expel existing members or change the nature of the LLP's business, all members can participate in management of the LLP and decisions on "ordinary matters" are by majority vote. A number of these provisions derive from partnership law and it is likely, given the nature of these default provisions, that in most cases a written LLP agreement between the members will be necessary to regulate the LLP, varying the default provisions on such matters as profit sharing and voting rights.
The LLP structure should be effective in most circumstances to remove personal liability for professionals practicing as members of an LLP provided that they are acting within the scope of their authority. There may be exceptional cases, by analogy with the position of company directors, where it might be held that an individual member has held himself out as assuming liability where it is reasonable for the other party to rely on that assumption (Williams v Natural Life Health Foods). If an individual member is held to be personally liable, it is the LLP (and not the other partners) that would be equally liable under the terms of the Act.
Although the present LLP may remove members' personal liability to customers, it may well be that banks financing LLPs and landlords of premises occupied by LLPs will require personal guarantees from members in the same way as they have previously required personal guarantees from partners. Unlike in the case of limited companies, LLPs are not constrained by maintenance of capital requirements nor are distributions only to be made out of distributable profits which provides little comfort to creditors of the LLP. There is, however, a provision enabling the clawback of property (including salary) withdrawn by a member from an LLP during the two years prior to commencement of winding-up of the LLP if at the time the property was withdrawn that member knew or had reasonable grounds for believing that the LLP was unable to pay its debts as they fell due or would be unable to do so as a result of the relevant withdrawal and other withdrawals being made at the same time.
The LLP is generally treated as transparent for tax purposes as its business is treated for tax purposes as being carried on in partnership by its members. Each member will be assessed to tax on their share of the LLP's income or gains.
There may be implications for LLPs carrying on business overseas as the local foreign jurisdiction may treat the LLP as a corporation for tax purposes. The position will need to be reviewed individually in each jurisdiction.
LLPs undertaking investment business should also be aware that the Inland Revenue is still considering what (if any) additional legislation may be required to ensure that investment and other businesses do not adopt the LLP structure for tax reasons rather than to achieve limited liability.
Transfer of Business from Existing Partnership
The Act contains an exemption from stamp duty on the transfer of a partnership's business to an LLP where the LLP's members correspond to the partners in the partnership. Strictly, the Act requires the proportionate interests in the conveyed or transferred into an LLP to be unchanged before and after the transaction or, if changed, this is for some reason other than tax avoidance. Whilst under strict property law the partners' interest in the LLP will replace their interests in the old partnership assets, the Inland Revenue have said they will not take the point. The Inland Revenue will also accept that any property transferred into the LLP within a year of its incorporation will qualify for relief provided the conditions are met.
Possible Uses of LLPs
The principal discussion in relation to LLPs has been in the context of limitation of liability of professionals. It may well be that the LLP will prove to be a useful vehicle for certain investment funds, particularly a closed ended fund where a 20 partner limit might be a problem. However, tax rules have been announced which will mean that members in a "property investment LLP" will suffer tax at the LLP level and members in an "investment LLP" will not be entitled to any interest relief on loans to acquire their LLP interest. The details of these provisions, including definitions of investment LLPs and property investment LLPs, are awaited.