Limited Liability Partnerships: a new way forward?

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What is an LLP?

The popularity associated with a private limited company can be attributed to the availability of limited liability to the shareholders. However, due to the public disclosure requirements alongside the statutory regime that a company must comply with it makes the running of a company very complex. Because of these reasons a traditional partnership is attractive but the major drawback of a partnership is that each partner has unlimited liability and could be exposed to having to meet and debts and liabilities of the partnership should it fail. This makes a partnership essentially unappealing.

These things fuelled the introduction of limited liability partnerships (LLPs) and the Limited Liability Partnership Act 2000 which came into force in 2001.  An LLP is fundamentally a hybrid between a company and a partnership.

An LLP is similar to a company in the sense that it exists as a ‘legal person’ independent from its members, can enter into contracts just like a limited liability company and, importantly, offers limited liability. However, in other ways an LLP is more like a traditional partnership.  For tax purposes an LLP is treated as a partnership and members’ profits are subject to income tax individually. An LLP also offers organisational flexibility like a traditional partnership. This flexibility promoted by an LLP has made it a desirable business medium.

What are the advantages of becoming an LLP?

Efficiencies

An LLP appears appealing because of its hybrid structure between a limited company and a Partnership. It is much easier to change the structure, management and distribution of profits within an LLP.

With regards to duties of the members in an LLP there must be at least 2 designated members who have duties to adhere to. The Limited Liability Partnership Act 2000 imposes responsibilities on designated members which include:

  • Appointing an auditor if necessary
  • Signing off an LLP’s accounts and filing them with the registrar of companies
  • Ensuring that an annual return for an LLP is filed with the registrar of companies
  • Ensuring that an LLP complies with the statutory filing requirements

These responsibilities are essentially the same as the responsibilities imposed on directors of a company. However, directors also have other statutory duties to comply with in addition. These duties are owed by the director to the company. These general duties are contained in the Companies Act 2006 and they include:

  • A duty to act within their powers;
  • A duty to promote the success of the company;
  • A duty to exercise independent judgement ;
  • A duty to exercise reasonable care skill and diligence;
  • A duty to declare any interest in a proposed transaction;
  • A duty not to receive any benefits from a third party without the company’s consent; and
  • A duty to avoid conflicts of interest.

In contrast the duties of the members of an LLP are governed by an LLP agreement (if there is one), This is a private document and the members therefore have more freedom to regulate their own affairs. An LLP is not required to have an LLP agreement though and if there is no express agreement certain default provisions will apply under the LLP Regulations.  Arguably though these default rules are not as extensive or onerous as the general duties directors owe.

Flexibility

As noted above an LLP provides the opportunity for flexibility around its internal rules and perhaps has more freedom in such decision making than a company.

Ease of establishment

An LLP can be quickly incorporated same day incorporation is even possible. Essentially to establish an LLP a minimum of 2 members being in business with a view to profit is needed.

An LLP need not file an LLP agreement at Companies House as to how the business will operate i.e. its internal rules. It is not a necessary requirement to have a written document between the members but it is beneficial otherwise default provisions in the LLP Regulations will apply. However, a Company must file the relevant articles of association at Companies House. Arguably it could be a disadvantage that there is no ‘model’ LLP agreement as  this means it will need to be drafted from scratch and could result in greater costs to set up as an LLP in comparison to a company.

Both an LLP and limited company must submit documentation to Companies House upon incorporation including relevant registration forms and in the case of a Company further details of the how the Company is intended to run i.e. the articles of association.

The incorporation fees for incorporating at Companies House are the same for both companies and LLPs.

Limited Liability of Members

The main attraction to an LLP compared to traditional partnerships is the limited liability the members will obtain. The LLP is a separate legal entity, so its members will not be liable for the debts of the LLP except in certain circumstances where the LLP becomes insolvent.

Many new businesses may choose to take this route of an LLP as it provides a safe option of limited liability alike a limited company however an LLP allows more flexibility in terms of how the internal affairs of the business are organised.

The Companies Register Activities Report for 2014/15 showed that there are currently 3,313,430 Limited Companies and 59,996 LLPs registered within the UK these figures were taken from a snapshot on 31st March 2015. This highlights the fact that Limited Companies are still the most popular business medium however LLPs clearly have significant appeal as a choice of business ownership. It will be interesting to see if significant numbers of LLPs continue to be incorporated, although only time will tell.

The links below provide further information regarding an LLP:

https://www.gov.uk/set-up-and-run-limited-liability-partnership/overview

https://www.gov.uk/business-legal-structures

This blog poBeth Lst was written by Beth Liddle. Beth is a MLaw student working in a business and commercial firm within the Student Law Office. On graduation she hopes to secure a training contract within a commercial firm.  In the meantime she plans to undertake paralegal work and also pursue her work at Citizens Advice Bureau to develop key skills she will be using in practice.