The Characteristics of Limited Liability Partnerships - Term Paper Example

1 Introduction: This paper will discuss the characteristics of Limited liability partnership (LLP) It compares other legal entities paying specific attention to unlimited partnerships and the advantages and disadvantages of an LLP entity over the other entities. The paper also details the preferred choice of professional partnership entities and the reasons for those preferences. The legal and environmental issues in converting a general partnership to a LLP and a LLC (Limited liability Company) thereby create an understanding of the viability of a LLP for a business. It also provides statistics and examples of existing and non-existing LLP entities and explains the strengths and weakness of the firms. The paper will detail and analyze the need for a change in the LLP law to make it more effective in terms of functioning for both the state and the business as such. Unlimited partnership has been the form of business for many years for professionals especially in the case of chartered accountants, lawyers, architects, vetenarians and many other professionals. Limited liability partnership (LLP) maintains the many characteristics of general partnership but shields the partner against unlimited liability from the creditors of the firm. In a Limited liability partnership the is the advantage of a flexibility of an unlimited partnership coupled with the limited liability of the partner as the business incorporated in this structure is treated as a separate legal entity and makes the entity responsible for any business debts arising thereof. In the US, state registration is required to set up an LLP. Besides the state needs proof that the partnership has reached levels or has enough resources to satisfy potential claims in addition to satisfying insurance requirements. A limited liability partnership is not taxed as a separate entity instead; the profits pass to the hands of the partner who are charged with income tax. (Irwin Mitchel 2008) The above are the basic characteristics of the limited liability partnership entity. Find below a few important drawbacks of limited liability partnerships, which has been a block for many unlimited partnership concerns for conversion: 1. Any partner can bind the firm without the other. The money invested becomes the property of the firm, is not subject to return unless, and otherwise stated in the agreements. 2. All partners of an LLP must consent to the sale of the assets. 2 3. The non-transferable nature of a partners interest where the transferee only the financial benefit but does not become a partner. (Cool lawyer 2008) 4. LLP varies in legal requirements based on the laws of the state. This variable nature of this entity makes it the least preferable. 5. Limited liability partnership has an important handicap it being limited to certain types of businesses only example an association of professional's example: Lawyers, Chartered accountants, architects, doctors etc. Moreover, Limited liability partnership was only founded a decade over and the concept is still young which is subject to changes and bound by the laws of the state. In order to understand the reason for the unpopularity for this legal entity we must look at the features and viability of the other legal entities such as Limited corporations and general partnerships ' LLC LLP Unlimited Partnership What is it' A type of company A type of company A type of company Members needed to set up: Between 1-5 2 or more 2 or more Taxation: Single taxation (Income / loss passed directly to members) Single Taxation Single taxation (Income / loss passed directly to members) Assets: Can hold Can hold Can hold 3 Legal entity: Separate entity from partners but members may be held liable for non-fiscal obligations. Separate from those of partners Has separate legal entity Management Level: Only Members and managing members. Decentralized Partners are Managers Legal agreements: May not be required in some states. May not be required in some states. Same in most of the states Suitable for: Small businesses Professional businesses Any business mostly small Paperwork and records: Not much paperwork is required Annual state reports are required Paper work is simple but legal procedures not clear and also vary Partnership agreement simple paperwork Ownership: Members are owners Members Partners. Limited Liability: ' Yes No Unlimited Liability Continuity of life: Indefinite term With LLPs, there is no definite term; death of partners will not cause dissolution. Death of partner or disagreement between partners can lead to Dissolution Regulation of entity name: Differs with each state but mostly LLC or L.L.C. is added. Must include the words "limited liability partnership" or abbreviation thereof Must include the word firm Stands for: Limited Liability Company Limited Liability Partnership General partnership Prevalence: LLCs are very common in the USA. LLPs are more common in the UK. Common in both US and the UK Shareholders meeting: Not necessary Not necessary Not necessary History: ' Started two decades back. This structure started a few decades ago (Toolkit media 2008) 4 A careful scrutiny of the above table only reveals advantages of the LLP. However new business prefer to choose an LLC or a corporation as a legal entity when compared to an LLP The reasons being the newness of the entity , the limitation of it to the professions and the varying law in different states. Besides existing successful partnerships are hesitant to shift to the LLP entity as they base their future on their past record and are happy to continue with the general partnership entity. Moreover business look and any change in the status of the business as potential taxing events that can eat into their profits or savings for investment. Choosing an entity: A general partnership converting itself to another legal entity prefers to choose an LLC rather than a LLP. The LLP offers the freedom of limited liability exposure without a shield against the partner's exposure of personal assets in the case of malpractice of law by an offending partner. Besides new professional practices are incorporated under PLLC (Professional limited liability Company) under the guidance of the state. Besides, for many small business owners opting for an LLC makes more sense. Most of the states offer only a reduced form of limited liability from the claims of creditors or borrowers. This is known as 'limited shield'. In many states, the owners in an LLP are offered much lesser protection against the claims of the creditors as compared to the owners of an LLC.Moreover an LLC can be formed with one partner and an LLP requires two. Many years ago, professionals had no choice but to form a general partnership, as the federal law prohibited professionals from forming a corporation. After the advent of LLC 's large partnerships were reluctant to change their entity as conversion of one form to another was a taxable event under the federal law, and required re-titling of all assets. The cost involved in such an exercise was unwarranted. However converting to an LLP was still not on their cards as different states offered different degrees of protection against creditors and the LLP is new in concept and was not a tried and tested model, which made the general partnerships remain the way they were 5 Find below some of the states offering on Limited shield for LLP's Alaska Louisiana Ohio Arkansas Maine Pennsylvania District of Columbia Michigan South Carolina Hawaii Nevada Tennessee Illinois New Hampshire Texas Kansas New Jersey Utah Kentucky North Carolina West Virginia (Toolkit media 2008) Conclusion: Any business would prefer to adopt a structure and entity that has been tested by time and has proved its worth in terms of legal actions faced, profit sharing interests, asset building and business expansion. These key aspects give a huge credibility to the entity and the rules that laws that govern it. The famous LLP Arthur Andersen is withering with just a little more than two hundred employees from its former 28,000 work force all across the globe. Even though the case was unanimously decided, favoring Arthur Andersen the LLP is still picking up its pieces.LLP have to be remodeled and enhanced with definitive guidelines with proper accreditation across the country. Unless the legal and authentication issues are removed, effective functioning of an LLP is a question. Besides the entity should have something more powerful as a feature or benefit that will add value other than limited liability to lure existing general partnerships to convert to LLP. A reflective report on teamwork and oral presentation skills and my contribution to the topic In my team of two, I was responsible for studying the characteristics of a Limited Liability Partnership with special emphasis on its limitations and drawbacks that have been detailed under the section of drawbacks in point form. I had further done an in depth analysis of the entity with regards to its origin and undertook a comparative study of the different legal entities namely the Limited liability company (LLC) Limited liability partnership (LLP) and the general Partnership. The details of the comparative study are mentioned above in the tabular column by doing so my team was able to chalk out the differences between the various entities, which facilitated better understanding of the LLP, and the reason for formulating the LLP. My contribution also educated the team regarding the birth of an LLP and the reason why this legal entity was formulated. As the LLP came into existence only after the success of the LLC, I was able to narrow down on two major differences between an LLP and an LLC. 6 1. Type of Business and 2. Personal Liability Type of Business: As mentioned earlier LLP's are limited to the type of business. In other words, it limits the conversion of general partnerships to LLP only if they are professional practices and the law clearly states the type of professional practices, being accountants, attorneys, physicians, dentists, architects, veterinarians, and licensed masseurs/masseuses. Personal Liability: An LLP can limit the liability of partners for issues other than personal acts. It cannot limit the liability250 of the partner or attorney for their personal malpractice of law. However, depending upon the prevailing state law the LLP can defend the innocent partner from the consequences of malpractice that arise from the offending partner. Moreover, a partner's personal assets are at stake if a partner was in supervisory or directory role of the offending partner.307 Further, my team, which started out with four members, is currently left with only two leaving a whole lot of analysis and incomplete work for us to do. However, we are balance in terms of providing analysis and experience in presentation. Find below the strengths and weakness of working of my group Strength: Analysis and learning: Though we are two in number the experience, it has given us in terms of analysis and learning us given us complete knowledge about the entity we are studying and why it has failed, the legal and operational obstacles in forming an LLP and the advantages of other entities over the LLP. The learning gave us insights on why the LLP has not gained acceptance from general partnerships even though it had the aspect of limited liability for partners or owners. Coordination: we learnt to coordinate with each other and manage time and information prudently, ensured research on the topic was complete in all aspects, and the concept was clear to the both of us, and gathered the sources we were required to check in order to obtain information. We managed our time together in compiling information and arranging them to create a proper flow and logic to the paper. 7 Sharing of ideas and information: We shared all information between us on the topic to ensure that we would talk one language and everything we knew was common. We agreed that all notes were in print format (2 sets each) and nothing memorized. Accommodation: As a team of two, we were able to accommodate our own weaknesses with respect to the time lag in gathering information or compiling them. We learnt to respect each other's time and made appropriate adjustments to ensure a healthy relationship. Weaknesses: Size of the team: Our initial exit of two members gave us a lot of work to do or we were unable to gather more information and lacked multiple inputs from which would benefit us in case the original size of the team was maintained. Non-specialization: We were unable to take different aspects of LLP law and specialize on the pros and cons of the law due to the lack in the number of members in the team. The presentation has the following strengths and weaknesses. Strengths: Clarity of concept: The concept of a limited liability partnership is clearly explained in the beginning of the paper. The presentation will outline the characteristics of an LLP and the reason for its origin. Explanation by comparison: The presentation clearly explains the difference between various legal entities and the relevant advantages of one over the other. The comparative table in a browser, which enables us to connect the various legal entities. The paper also states the drawbacks point by point to alleviate the reason for the LLP's non - acceptance. Consensus: The paper arrives at a convincing consensus of why the LLP was not opted by a majority of unlimited partnerships. It reiterates all the essential characteristics in the form of advantage or disadvantage and portrays a clear picture of the actual situation of the entity. 8 Weaknesses: Study of LLP in other countries: The paper does not contain information about the study or the behavior and success of the LLP in countries like the UK. Statistical data: The paper also has the weakness of statistical data where we are unable to prove the success or failure of the entity by means of numbers, graphs or a trend analysis. Efforts to overcome weaknesses in the future or a strategy to eliminate weaknesses. 1. Ensure that we are in team which is positive in carrying on the given work with high energy and driven by commitment although there is no foolproof method to guarantee the same. Communicating and understanding the mind frame and temperament of the team members regarding the given project can help largely. Be prepared with the contingency plan in case of exit of any member in the sense to ensure that all data and information secured from the member before the exit so there is time wasted on gathering and searching for the information again. 2. Ensure each aspect of the paper is clearly defined and the various parts of the subjects are research thoroughly to offer specialization 3. Take time off to study the concept practiced in different geographies and different environments and give a comparative study carefully listing the success or failure of the concept. 4. Provide statistical information to show proof of the findings and produce graphs or pictorial representation of the same. (Team work guide 2005) My learning on teamwork and oral presentation skills Working together as a team has been such an enriching experience and has instilled in me qualities that have given me a better personality. It has given me confidence and interpersonal skills and has exposed me to the power of togetherness. The most important things I learnt for team work are: 9 1. To communicate team goals clearly and effectively to every member of the team, so that there is no confusion or lack or clarity on the goal to be achieved. 2. To complement and supplement team members for the work they do. 3. Giving and receiving inputs on the given topic. This is the most enriching part of teamwork where we get to receive feedback and analysis on various angles for any given fact. 4. To learn and share best practices, in terms of gathering information compiling and organizing the same. 5. Working together as a team has provided support and motivation to produce better results. 6.Teamwork has taught me to co operate and co exist, learn, teach and grow to greater heights. 7. Teamwork has helped me to recognize the value of my ideas and inputs and has taught me to accept others ideas and inputs also opened doors to a very different way of looking at any topic. Learnings on oral presentation. Speaker's assertion and proper body language: As a speaker to be confident on the topic and portray the same in body language too. To start the oral presentation with phrases or questions, and subsequently answer them in a befitting manner. It is very important to show confidence on the topic spoken, as the audience will look at the speaker to know if he/she is credible enough to speak on the subject. Voice Modulation: Another important aspect of oral presentation is the modulation of voice based on the message. This gives feeling and emotion to the presentation ultimately drawing more attention and more listeners. A monotonous voice can irritate the audience and make the presentation a dull and lifeless one. Moreover, presentations with no voice modulation also leave the audience with no information. 10 A good rehearsal: To practice the speech and the sequence in which the presentation is done. A good rehearsal always helps in front of a huge audience as the speaker will be able to focus on the audience rather than the notes in hand .Frequent reference to the notes also reflects the lack of knowledge of the speaker . A rehearsal also gives the speaker the sense of timing. Fewer perspectives: It is always good to stick to a few clear and correct perspectives rather than many, which can leave the audience confused. The speaker must reiterate the purpose of his/her speech and the conclusion drawn from it. It is important to stick to three or four primary aspects, clearly explain, and draw logical conclusions thereof. 11 References: 2008, Limited liability Partnership, Toolkit media group, New York, viewed 23 August 2008,http://www.toolkit.com/small_business_guide/sbg.aspx'nid=P12_4265 2005, Team work and team building essentials, Team work guide.com, viewed 22 August 2008, http://www.time-management-guide.com/team-building.html Mitchell Irwin 2008, Partnership and LLP legal advice, Irwin Mitchel London, viewed 22 August2008, http://www.irwinmitchell.com/Business/CorporateCommercial/Partners hips AndLimitedLiabilityPartnerships.htm Silver Judith 2008, Limited liability partnership business info, Cool Lawyer Inc., Florida, viewed 23 August 2008, http://www.coollawyer.com/webfront/bizfilings/LLP.php Read More