What Is a Limited Liability Partnership - Essay Example

Question What are the implications for a business establishing as a Limited Liability partnership and what 'flexibility' does it provide compared with limited companies Answer Limited liability partnership is a concept relating to the liability of the partners as it implies from its name. As we all know that in the partnership form of conducting business, every partner is responsible by law for the actions and deeds of other partners in the business. Now the question arises that what does responsible by law means for the partner's deeds. It means that when a business is being conducted by a group of persons in the form of partnership then they have to pay for all the liabilities, debts and loans which were taken by their partner and that they cannot be relieved of their this responsibility on the defense ground that they are not responsible for the actions of others conducting business along with them. In a general format of partnership business it is a legal practice that all partners have unlimited liabilities with respect to their business debts and if one person is declared insolvent then the other partners are bound by law to pay for his debts, loans and liabilities from their own personal assets and property. Limited liability on the other hand is not the same as other partnership concerns; it differs a lot in the liability context from other partnership businesses. With respect to the liability clauses, it is more resembling to the corporation. Limited liability means that partners have limited liabilities with respect to their debts and loans of the firm. One partner is not jointly and severally responsible for the actions and deeds of other partners and that his personal assets will not be used to pay for the liabilities of the firm or other partners. Therefore, every partner in the partnership firm will have limited liability towards the liabilities of the firm and other partners in the firm as well. This is very much same to the limited liability company in which every member of the company is responsible to pay for the liabilities of the company to the extent he has invested into the company. Therefore, a limited liability partnership can be defined in the following words: Thepartneror investor's liabilityislimitedto theamounthe/she has invested in thecompany. Thissetuptypically prevents each partner from beingheldaccountablefor the wrongdoings of another partner. Although an LLP can be used in manyfields, it is most commonly used inlawor accountingfirms. The laws relating to an LLP differ significantly betweencountries, and even from state to state. As the definition states that the liability of the partner or investor is limited to the extent of amount he or she has invested in the firm and that this type of partnership prevents one partner for being held responsible for the work of other partners. It is also stated that this partnership can be used in many fields but this sort of partnership is particularly important for professional firms. In professional firms as the size of the firm started to grow and more and more partners were needed to perform the work in the firm, there was a great threat of extra ordinary risk involved in the addition of other partners in the partnership firm where every partner is an agent of other partners and jointly and severally responsible for the work of other partners. Therefore, there is thought to be dire need of forming limited liability partnerships in the professional firms where matters relating to high financial values are very important to the firm and the firm's professional advice is being given relating to those high valued matters. If anything goes wrong due to the recklessness of one partner then other partner should not be held responsible for the wrong doings of that partner. The requirements for the formation and conduction of business as a limited liability company as mentioned in the law of United Kingdom under the respective acts are described in the following paragraphs. Set-Up The set up requirements as mentioned in the law of UK are as follows: Each member needs to register as self-employed. There must be a minimum of twodesignated members- the law places extra responsibilities on them. If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member. LLPs must register at Companies House. It's a good idea to draw up a written agreement between the members. For further advice, consult an accountant or solicitor. Every member of the firm is required to get himself registered as self employed with the respective governing authority for limited liability partnership firm. There must be a minimum of two designated members and some extra responsibilities are also placed on those designated members of the firm by the law. If the members of the limited liability partnership are reduced in number and there are less than two designated members left in the partnership then every member is deemed to be a designated member of the firm with extra amount of responsibilities on the every member of the firm. Therefore, the amount of designated members should not reduce than two in any case. Limited liability partnerships should register themselves to the Companies House as limited liability companies are registered with the Companies House. The agreement of profit sharing and responsibilities should be in writing, it is preferred that the agreement should be in writing or for further advice an accountant or solicitor should be consulted. Management and raising finance Usually the members manage the business, but can delegate responsibilities to employees. Members raise money out of their own assets and/or with loans. Managers are supposed to manage the business, however they can delegate responsibilities to their employees if the need be. It is not mandatory for the managers to do all the business themselves as they can employee some more people for the purpose of performing the work they cannot perform. Another matter being defined is the matter of raising capital for the purpose of conducting business. Members can raise money for the business either through applying for loans from financial institutions or can arrange for money themselves. However, they cannot raise capital through public issue, the way limited liability companies or certain corporations can do. Records and accounts The LLP itself and each individual member must make annual self-assessment returns to HM Revenue & Customs (HMRC). All LLPs must file accounts with Companies House. An annual reminder letter will be sent to the LLP a few weeks before the due date requesting they download the form from the Companies House website. It needs to be completed and returned to Companies House with the appropriate fee. Limited liability partnership and each individual member of the partnership is required by law to make annual self_ assessment of returns to the concerning authority. In addition to that all of the registered limited liability partnerships must file their accounts with the Companies House. Companies House will send the annual reminder letter of the filing of accounts to the limited liability partnership a few weeks before the date that information is required by them. Profits Each member takes an equal share of the profits, unless the members' agreement specifies otherwise. According to the law all members of the firm are required by law to share the profits in equal proportions unless there are other provisions governing the profit sharing ratios of partners in the partnership deed of the partnership firm. Tax and National Insurance Members of a partnership pay tax and National Insurance contributions (NICs) on their share of the profits. The profits of a member of an LLP are taxable as profits of a trade, profession or vocation and members remain self-employed and subject to Class 2 and 4 NICs. Members of the partnership are bound by law to pay tax according to the National Insurance Contributions (NICs) with respect to their share of the profits of the firm. It is further stated in the ordinance that the profits of the members of the limited liability partnership are taxable according to the profits of a trade, profession or vocation and that the members remain self-employed according to the law. From the above mentioned requirements it can be easily and clearly seen that the formation requirements are very much same to the formation of limited liability companies and that the governing body in the limited liability partnership is the same as that of limited liability company .i.e. Companies House. For the sake of establishing a limited liability company, the law requires at least two designated members and they have some extra responsibilities according to the law. Records and accounts are to be maintained by the firm as mentioned earlier according to the law. Moreover the partners of the firm are also required by law to maintain and file a return of their income during the period along with the firm filing the return of its income and expenditure during the period. Limited liability partnerships are also responsible for the payment of taxation on its taxable income according to the provisions of the law. Limited liability partnerships are more suited to the professional organizations especially those relating to the professions of accountancy and legal organizations. The firms of accountants and lawyers are long being established as limited liability partnerships due to the nature of their work and due to the fact that the nature of their professional work and their expertise creates an immense amount of pressure and stress on the partners mind if their liability is unlimited due to the nature of their work. There are certain benefits which are enjoyed when the business is being carried out with limited liability partnership and one of the best parts of it is the extent of liability being made limited by the imposition of law. With the enactment of law relating to limited liabilities partnerships, partnerships have started to enjoy the same benefits as were enjoyed by the limited liability companies by according to the Companies ordinance. A limited liability partnership is relatively easier to form as compared to the limited liability company. There are a lot more details attached in the law relating to the formation of limited liability companies as compared to the formation of limited liability partnerships. There are many stages involved in the incorporation of a limited liability company from promotion to inception whereas a limited liability partnership is relatively easy to form as compared to the limited liability company. It is easier to for a limited liability partnership whereas to form a limited liability company, one has to seek an expert's advice and then work accordingly. There are more requirements for the limited liability companies for carrying out their work as imposed by the Companies House whereas a limited liability company enjoys exemption from some of them. For instance, limited liability companies are required by law to maintain and retain their accounts according to the requirements of the law. The limited liability company is required to publish its accounts and annual reports in the prescribed form according to the law whereas limited liability partnerships are relieved from doing so. This way a limited liability partnership is a lot easier to manage as compared to the limited liability company. Members of limited liability companies are not the managers of the business whereas the members of the limited liability partnerships are the managers of the business and they take active part in carrying out the business. Directors and managers of limited liability companies are the agents of the members of the company and partners are the managers of the partnership firm. References Limitedliabilitypartnership: a new form of business association ..., Volume 2 Great Britain. Department of Trade and Industry- 1997 Business William M. Pride,Robert J. Hughes,Jack R. Kapoor-Business & Economics- 2009 Limitedliabilitycompany &partnershipanswer book Alson R. Martin-Business & Economics- 2000 Business Law - Page 650 Robert W. Emerson-Business & Economics- 2003 Financial management: theory and practice - Page 5 Eugene F. Brigham,Michael C. Ehrhardt-Business & Economics- 2008 Fundamentals of Financial Management James C. Van Horne,John M. Wachowicz-Business & Economics- 2008 Considerations on partnerships withlimitedliability - Page 13 J. R. (John Ramsay) McCulloch -Limited partnership- 1856 Read More