Limited Liability Partnerships - Essay Example

Limited Liability Partnerships The Limited Liability Partnership was introduced as a separate legal entity by way of the Limited Liability Partnerships Act 2000 and its Regulations 2001, which came into force on the 6th of April, 2001. It is a hybrid of the two most popular business formations in the U.K. - the Limited Company and the Partnership. Any new or already existing firm that comprises two or more people can successfully incorporate as a Limited Liability Partnership, which incorporates elements of both forms. The most significant aspect of LLPs is that they offer added security for partnerships from the limitation of liability of individual members for the firm's debts.(Davies, 2001). While a limited company is formulated as a legal entity where limited liability exists, this was not so in the case of partnerships, which were not legal entities and thereby made partners legally liable for all the firm's debts. The Limited Liability Partnership has the following features (a) it has a separate legal personality (b) liabilities of individual members are limited to the amount they agree to pay in the event of an insolvency (c) partners are expected to adhere to the duties and obligations currently imposed upon Directors of Companies (d) the LLP is not expected to hold AGMs or observe the rules for shareholder protection set out in the Companies Act and (e) agreements about how the affairs of the LLP will be run are left to the discretion of individual members, but partners are entitled to share in the management of the firm on an equal basis (Davies, 2001). Dr. Michael Twomey, a partnership lawyer, points out the advantages of a partnership. Firstly, it allows the partners the freedom and flexibility to conduct the Company's affairs as they wish and are not subject to the provisions of Company law. Secondly, they are not required to file accounts; hence their accounts are not publicly scrutinized. Thirdly, since a partnership is not a legal entity, hence no partnership tax is levied and the firm does not pay tax, only the partners do(MOE, 2002). But this singular advantage offered by partnerships, of privacy in the manner in which internal operations of the firm are conducted, is eliminated by way of the LLP, because such privacy can no longer be retained when LLPs are required to file audited accounts at the Companies House and to also disclose information about profits and the share of profits accruing to the highest earning partner (Davies, 2001). As a result, the financial affairs of partnerships will now be brought under public scrutiny and partners will be required to divulge details of profits accrued as well as shares of such profits that are being routed to the partners. One of the reasons why the LLP has been advanced is to mitigate the legal liability of partners for the debts of the firm. This need was especially highlighted in the aftermath of scandals such as Enron, where the Arthur Anderson partners who were not theoretically related to the Enron case, could still be held liable for repayment of debts. But in practice, companies in Britain have not demonstrated any eagerness in coming forward to be incorporated as LLPs. As pointed out by Towmey (MOE, 2002), Clifford Chance, the biggest law firm in London, chose to become an LLP based in America rather than an LLP based in Britian, because in effect, the LLP in Britain has lost all the advantages of financial privacy and flexibility of a partnership. While a partnership was earlier not taxed, most of the principles of Company law have now been applied to it under the LLP format, as a result of which it has to function as if it is a Company rather than a partnership. Thus, it may be noted that the LLP has failed to address one of the most pressing reasons why it was introduced, i.e., the need to ensure that partners are not held liable for the firm's debts. This aspect was vital especially in the case of small businesses where incorporating as a Company is not a feasible option because it involves too much expense and is subject to too much inner regulation and payment of taxes. But at the same time, some means was required to mitigate the responsibility thrust upon partners to assume personal liability for the firm's debts. While this was the objective however, the LLP has not achieved it in practice, because in the process of limiting liability, it has made the partnership subject to company law, as if it is a Company and removed the financial privacy and the facility of no payment of partnership tax, while imputing additional obligations on partners which did not exist before. For example, this may be noted in the case of legal partnership firms. Under an LLP, if a solicitor who is a member of an LLP gives bad advice to a client as a result of which the client suffers damage, the LLP can be sued in Court for damages. This was not the case under the earlier partnership route, where the partnership could not be sued as a legal entity, it was only the individual solicitors who would have been personally liable in tort. Another advantage of the earlier partnership, which has been done away by LLPs, as mentioned earlier, is in the matter of partnership tax. The profits of an LLP are taxed in the same manner as those of a sole trader and in some instances of insolvency, partners of an LLP may still be held liable for the debts of the company.(Lee, 2008). As a result, the disadvantage of the partnership, i.e, the liability for the debts of the partnership still apply, while the privacy of finances is lost due to the requirement of filing accounts. On the basis of the above, it may therefore be noted that the LLPs are not emerging as a popular option, mainly because they have brought the financial affairs of the partnership under public scrutiny. While it is true that LLPs do not require the holding of AGMs and the requirement to keep shareholders informed of all the activities that are being pursued by the firm, nevertheless the earlier freedom that partnerships had in the management of their internal affairs has been removed. The partners in an LLP are expected to the requirements of Company law and function under the same obligations and responsibilities expected of Directors of Companies. As a result, the freedom and flexibility they enjoyed in conducting their affairs has been removed under LLPs. While the objective of the LLPs has been to limit the liability of partners for debts of the Company, in actual practice this has also not been fully achieved. In the event of an insolvency, the partners can still be held liable for the debts of a firm in some instances, therefore the advantages for a partnership to convert to an LLP may be limited. Whereas earlier, the partners enjoyed a total and complete freedom in their operations without any kind of accountability to the public, this situation has changed because partners now have obligations imposed upon them similar to Directors of the Company. But the most significant limiting factor form converting into LLPs remains the loss of privacy of financial affairs. While earlier, partnerships were not required to file accounts, neither were they required to pay taxes, they are now required to file accounts and can also be taxed in the same way sole traders are taxed on profits accruing from their business. While LLPs were formulated to target companies such as solicitor partnerships and other small businesses, on the basis of the above, it may be noted that for such businesses, the LLP has disadvantages as well. Notably, LLPs can now be sued, whereas partnerships could not. This leaves the firms, especially of solicitors, open to legal action against them and the LLP may be held liable for damages accruing to clients as a result of negligent advice. On an overall basis, therefore, it may be noted that the advantages offered by the LLP do not appear to counteract the loss of the three major advantages of a partnership as Towney ahs pointed out. The only disadvantage in the earlier partnership arrangement is the imposition of liability for the debts of the partnership. But while this has not been fully addressed under the LLPs, i.e, partners may still be liable for the debts of the firm in the event of an insolvency, there are several other restrictions that have been imposed which cause partnerships to lose the advantages they have been enjoying, such as privacy of financial information and the freedom and flexibility in conducting their affairs free of public scrutiny. Due to such reasons, most partnerships and small businesses have not been taking to LLP too enthusiastically. References: * Davies, John, 2001. "The LLP: About to take off", Credit Management, March 2001, http://findarticles.com/p/articles/mi_qa5308/is_200103/ai_n21468953; August 17, 2008 * Lee, Mark, 2008. "Limited Liability Partnerships' A better business structure than a limited Company'", http://www.ecademy.com/node.php'id=105778; August 17, 2008 * Minutes of Evidence, 2002. "Limited Liability Partnerships Bill: Committee stage: Minutes of Evidence", June 19, 2002, North Ireland Assembly, http://www.niassembly.gov.uk/enterprise/moe/moe020619.htm; August 17, 2008 Read More