Partnerships represent one the oldest forms of association and were in use long before companies became regulated to offer limited liability. This is the key feature to consider in ordinary partnerships as generally, each partner is jointly liable for the obligations of the partnership. In many cases each partner is jointly and severally liable for the wrongful acts or omissions of a co-partner.
In more recent times changes to partnerships in respect of limiting liability have created two distinct variations.
Limited partnerships are step beyond an ordinary partnership as they comprise a mixture of ordinary partners and limited partners. Ordinary partners remain jointly liable for any debts and so are equally responsible for paying off the whole debt. A limited partner’s liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.
Limited liability partnerships (LLPs) have what were once termed partners designated as members. Yet LLPs allow their members the flexibility of organising their internal structure as a traditional partnership.
Essentially the legal status of a LLP, like a company, is incorporated. Like a company it gives the benefits of limited liability. Similarly a LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the members will be limited. However LLPs retain many features of the ordinary partnership.
Indeed the development of LLPs resulted from traditional partnerships of professionals such as lawyers and accountants. The liabilities of ordinary partnerships had become crippling to individual partners by the increasingly litigious world of business. The LLP offered a way of limiting personal liabilities.
Common features of all types of partnership
All three types of partnership mentioned above have the following features in common:
- two or more persons – known as the partners – share the risks, costs and responsibilities of being in business
- a partner can be an individual or another business, for example a limited company or another partnership
- the profits and gains of the partnership are shared among the partners, unless the partnership agreement states otherwise
- each partner is personally responsible for paying tax on their share of the profits and gains,
- partners raise money for the business out of their own assets and/or with loans
- the partners themselves usually manage the business, although they can delegate certain responsibilities to employees
- it’s possible to have ‘sleeping’ partners who contribute money to the business but are not involved in running it from day to day
- the partnership must keep records showing business income and expenses
In addition it is usual to have formal and written agreement between the partners. This is designed to fit the purpose of the partnership.
Would a LLP be useful for my interests?
Our experience is that clients consider LLPs as an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. A LLP is an alternative corporate business vehicle to companies and for that reason an LLP can be considered as part of a corporate structure.
However we recommend careful consideration of LLPs if an UK face is required for business interests. For example an LLP of two off- shore domiciled partners, whether they are individual persons or companies, do not project an UK face. If this image is required then companies can provide this in a more convincing way.
What is the status of a LLP?
The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the members will be limited.
Note that both ordinary and limited partnerships have no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved – although the business can still continue. By comparison a LLP has a more secure existence as, subject to their being at least two members, the surviving members can continue or new members can be introduced to the LLP.
What sort of organisation is a LLP?
Any new or existing firm of two or more persons can incorporate as a LLP. What were once termed “partners” in an ordinary partnership are designated as “members” of a LLP. In turn members have some duties in LLPs that are similar to those of a director in a company.
Deed of partnership of a LLP
A deed of partnership (or ‘partnership agreement’) is a legally binding agreement between the partners who are in business together. It describes how the partnership will be run and the rights and duties of the members themselves.
It’s not absolutely necessary to have a deed in order to set up a LLP, but we suggest it can help to prevent misunderstandings and disputes between members. Note that LLP’s do not have Memorandum and Articles of Association like companies.
Naming your LLP
A LLP can trade under the names of the partners, or some of the partners. You can also to use an established business name of this kind if you are converting your ordinary partnership to a LLP. Alternatively you can use another business name.
The trading name should not be the same as, or too similar to, that of any business that already exists, including those of companies. The name must end with ‘Limited Liability Partnership’ or ‘LLP’.
Can I convert from being a limited company to a LLP?
The laws for LLPs do not allow for a ‘conversion process’ – in the way that a limited company can convert to PLC status, for example. However an existing company name can, under certain circumstances, transfer to a new LLP. The process will involve a closely controlled company change of name and LLP incorporation.
What are the LLP disclosure requirements?
They are similar to those of a company. LLPs are required to provide financial information equivalent to that of companies, including the filing of annual accounts. Among other things, they are also required to:
- File an annual return
- Notify any changes to the LLP’s membership
- Notify any changes to their members names & residential addresses
- Notify any change to their Registered Office Address
What are the duties of a designated member?
Designated members are responsible for carrying out certain duties including some of those that would normally be carried out by a company director or secretary. They include such things as:
- Signing the annual accounts
- Filing the annual accounts and annual returns with Companies House
- In the event of Insolvency proceedings, providing any statement setting out the affairs of the business i.e. assets, debts and liabilities.
How is a LLP taxed?
Unlike limited companies, LLPs are not generally liable for Corporation Tax.
Generally, LLPs are treated the same as other partnerships for tax purposes. As with partners in ordinary and limited partnerships, profits are shared among the members of a limited partnership. Individual members – not the limited partnership – pay tax on income or gains.