Limited Liability Partnership - Assignment Example

Ahmad AL-Fozan ALAHMD83 Limited Liability Partnership is a new concept. This was formally codified in the year 2000 by enactment of the Limited Liability Partnerships Act 2000.1 According to the explanatory notes2 The Acts main purpose is to create a new form of legal entity known as a limited liability partnership ("LLP"). The essential feature of an LLP is that it combines the organisational flexibility and tax status of a partnership with limited liability for its members. This limited liability is possible because an LLP is a legal person separate from its members. A Limited Liability Partnership (also known as LLP) is fundamentally a common partnership having one important difference from a regular partnership. It is a body corporate. It exists as a separate entity than the members of which it is comprised. The new form of business combines the best features of the earlier two forms. Some features are taken from the partnership concept and some from limited company. The main difference between a regular partnership firm and a LLP is that the LLP has a separate and distinct identity. It is a legal entity. Unlike in a partnership firm, the partners are not identified with the firm beyond their own liability which is limited as per the articles of incorporation. This liability can be decided by the partners themselves. The partners in an LLP are not jointly and severally liable for the acts of the firm or one of its partners, as is the case with a partnership firm. Limited Liability Partnership has been applied much prior to its enactment in the United Kingdom. It was prevalent in the USA and also in some other countries. In a partnership firm, a partners dealings with the clients of the firm were in his capacity as principal (acting on behalf of other partners) and hence in case of breach of any kind, the aggrieved client would have two remedies available. One is liability arising out of contract, the other being under tort. But in a LLP, the client or customer will have only one claim, that of tort. This is so because the client will enter into the contract with the LLP instead of a partner. In a famous case3, the House of Lords had occasion to consider the liability of an individual where acting on representations made by him, the plaintiffs suffered a loss in their business. It was held that the individual’s liability must be decided looking at the nature of representations made, and the belief with which the clients enter into the contract. It is also to be noted that in case the negligence is proved, the LLP and not members individually will be liable. Also, the LLP firm is entitled to purchase and hold property. But unlike in a partnership firm, this property does not belong to the partners. Upon dissolution the partners may share the proceeds from the sale of such property or divide it amongst themselves. It was felt necessary to enact limited liability partnership law because of four major reasons: (1) Increase in litigation regarding professional negligence and the size of claims made in such cases. (2) The increase in number of members of a firm, which may result in strangers becoming partners in a firm. This could otherwise be inconvenient in a partnership firm. (3) There is increasing demand for specialization and it is advantageous if all services are provided by the same firm. A LLP allows members with varied skills to come together with the advantage that their liability for negligence in areas in which they are not specialists will be limited. (4) In a regular partnership firm, there is risk to the partner’s personal assets in case of damages for negligence where the assets of the partnership firm and the insurance cover do not sufficiently provide for damages awarded by courts of law. In a Limited Liability Partnership there is absence of individual and personal liability of debts and obligations upon partners. It protects all of its partners, like a lawful shield against any kind of personal liability, unlike experienced in other forms of partnership. In Limited Liability Partnership, an investor’s liability is narrowed down to the amount he had invested in the business concern. A major advantage and lead that this type of partnership has is that it prevents and protects individual partners from being penalized for the misconduct and wrong doings of other partners or members. The laws pertaining to an LLP differ nationwide and across the globe. Limited Liability Partnership pattern of a business concern can be applied and used in any industry, but so far, accounting and law firms have been seen to endorse such type of business foundations and activities. It is not so prevalent in other industries. A limit to which an individual’s liability can be extended is determined by the partners’ or members’ consent and willingness. This is expressed and specified while registering the LLP with the government. If a partner, in person, is liable to a third party for any breach of contract, then the firm does not suffer. One major advantage is that the partners are not individually liable for the breach. It will be considered that the firm (LLP) has committed that breach. A business concern or a partnership that delivers definite professional services, can also get itself registered as a professional limited liability partnership, being no different from an ordinary limited liability partnership, it just provides professional services. Such a business typically consists of professionals from law, medicine, engineering and accounting. In the type of a business concern under consideration, the number of individuals involved in the partnership share in the risks and responsibilities: they also share loss and profits of the business. As opposed to the partnership firm a LLP firm will make individual partners only the Setting up an LLP Every partner and member registered itself as self-employed. There are always two designated members (as the law names them). They are given some extra and harder responsibilities to manage. They are responsible for additional duties like registering the firm and providing information to third parties. They should sign the accounts of the firm and should also be signatories to the articles of incorporation. If there are equal to or less than the required number of members to be assigned as two designated members, every member should behave and manage the firm like a designated member. It’s a compulsion for an LLP to get registered at Companies House or the chambers of commerce as per the regulations of that particular country. It is always feasible and lawful to document all the terms and conditions between the members. This ensures that in case of dispute, there is a clear set of norms on which the dispute can be resolved. As per the provisions of the Limited Liability Partnerships Act, where no such agreement has been entered in to by the members default provisions will apply. Financing and Managing the Business: As a normal practice, members are managers of the business but to keep a uniform flow of management of activities, members can hire qualified and deserving employees too Loans or personal assets are normally used to finance such a business concern/partnership Keeping Accounts and Managing Profits Every LLP should have its accounts registered with the chambers of commerce or the companies’ house. Unless specified otherwise in the agreement, every member takes an equal share of the profit from the company’s earnings. The profits earned by an LLP are taxable and members or investors of an LLP must pay taxes and national security insurance according to the bracket that they fall under. Another important point is that if a company exempts a person from continuing any partnership with him, he is not liable to any profit or loss being incurred by the company. Critics claim that the LLP law must integrate a recoup rule which allows the liquidator to investigate about all the withdrawals made by the firm on behalf of any member i.e. the investor on a time span of atleast one year aforementioned from the date of commencement of the liquidation. These withdrawals are pertaining to share of profit, employee’s salary repayment or payback of interest on a loan by the firm. In instances where an LLP concern has to continue for about or more than 6-months with a single individual/investor, that member then becomes a single and sole owner and jointly liable for all the liabilities and profits. Another point worth noticing is that if a person i.e. an investor or member authorizes the signature of a check and the name of the company is not printed correctly on that instrument, the instrument becomes liable to the holder unless the amount is agreed and then paid by the LLP concern itself. It is considered a caution for all the LLP members that they should be extra cautious about dealing in over-the-liability amounts with another company. The notion that is given here is for the fact that the dealing party should not be suspecting the members as being the agent of the company or being some prank dealers, dealing on behalf of the company. However, this sort of protection should not be taken for granted and LLP should take care of all the companies’ acts and business activities keenly, so that there is not a blotch of misconduct or false or fake agreement and deal. All the members of an LLP concern are indebted to a personal and professional responsibility of heed that besides a clear assumption of responsibility, the company and the investors should have a clear relationship with the customer or the client. It is the duty of the court to look into the matter and judge about who is the culprit and who’s not. Also that the breech of contract and responsibility falls on who’s part. This is also considered as the main liability and responsibility of the co-investors and partners as well to look for clear procedures and honest dealings whenever there is a client and customer relationship. As a matter of law, any form of liability that falls under the category of civil or criminal should be dawned upon collectively on all the members of the firm. Financial penalties should be practiced against any breach of contract, law or legal requirements by the companies’ act or companies’ house. Laws pertaining to LLPs, file all the terms and conditions required for such companies i.e. LLPs to disqualify a person if he is found to be guilty of being involved in suspicious activities, dealing with some third parties on behalf of the LLP when the deal is of no concern to the LLP, also an outside person shadowing the members in a way that he is involved into some illusory deals with major clients of the company. Conclusively this is allowed to carry out a disqualification order against any member or a so-called shadow member of a limited liability partnership concern if their action in such a conduct requires any warrant. Such an order against any member or an investor of an LLP will exclude the concerned person from being a member of that LLP. Such orders for disqualification can be made against breaches of on-going duties and concern. However, the court, then decides the extent of breech and the reasons involved while approving or disapproving the case. The flexibility provided by the LLP model of business is that the articles of association are to be drafted at the instance of the members and as per their wishes. In a limited company there is a model set of articles of association. But in case of LLP, the relationship between the firm and its members and between the members themselves is decided by the members themselves. Bibliography Limited Liability Partnerships Act 2000 http://www.opsi.gov.uk/acts/acts2000/en/ukpgaen_20000012_en_1 (accessed on March 15th, 2010) Explanatory Notes to the Limited Liability Partnerships Act 2000 http://www.opsi.gov.uk/acts/acts2000/en/ukpgaen_20000012_en_1 (accessed on March 15th, 2010) Limited Liability Partnership. http://www.accountancy.com/articles_students.asp?id=150 (accessed March 1st, 2010). Limited Liability Partnership. http://legal-dictionary.thefreedictionary.com/Limited+Liability+Partnership (accessed March 1st, 2010). Limited Liability Partnership. http://www.investorwords.com/5636/Limited_Liability_Partnership.html (accessed March 1st, 2010). Practical advice for business. http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073789612 (accessed March 1st, 2010). Williams and another v. Natural Health Food and another (1998) WLR 830. http://www.bailii.org/uk/cases/UKHL/1998/17.html Read More