This article will discuss the characteristics and formation of a legal entity, limited liability partnership, or LLP. We shall compare LLPs with limited companies (Ltd or plc) where appropriate to better understand the concept.
Since April 2001, two or more persons have traded together as a limited liability partnership (MacIntyre, 2018). The Limited Liability Partnership Act 2000 enabled to create of a new form of legal entity for companies, commonly known as an LLP, which according to section 1(2) of the Act, is a body corporate (with legal personality separate from that of its members) which is formed by being incorporated under this Act.
Although LLPs share some common characteristics with traditional partnerships, there are some significant differences. From a legal standpoint, ordinary partnerships in the UK are formed under the Partnerships Act 1890, which does not apply to LLPs. Moreover, partners in an ordinary partnership are liable for debts and share the responsibility for any losses a business makes, whilst an LLP is a separate legal entity and has its own rights. Thus, members of an LLP are not typically liable for the LLP debts; similarly, as shareholders of a limited company are not liable for the Ltd or plc entities' debts and only risking the loss of money they have already invested in to obtain shares.
The emergence of Limited Liability Partnerships
Although, a study of medieval laws such as Roman Law, early Islamic laws,
Byzantine law reveals that the concept of limited liability existed even during those times (Deep, 2012). The modern concept of an LLP started to emerge in the 1980s as the response to many insolvency cases of traditional partnerships, mainly of US Savings and Loans firms, an equivalent to UK Building Societies (source: British Government). As a result, many partners who were not directly responsible for the debts of failing partnerships were still liable to repay millions of dollars.
Inevitably, there was a need to create a new legal entity that could enjoy the benefits of both traditional partnerships and limited companies. The first LLP was created in the United States when in 1991, Texas introduced the concept of a limited liability partnership (LLP). The idea of LLPs was so popular that the majority of US states eventually passed an LLP legislation.
United Kingdom witnessed an emergence of an LLP in the late 1990s when after a lengthy consultation, a bill was introduced into the House of Lords in November 1999, which received Royal Assent on 20 July 2000. As a result, the Limited Liability Partnership
Act 2000 has been the main document regulating LLPs in the UK ever since.
Why do business professionals choose to form an LLP rather than an Ltd?
Limited liability partnerships share some of the characteristics of limited companies and ordinary partnerships' characteristics. (MacIntyre, 2018). Some individuals, especially lawyers, accountants, or financial services professionals, prefer to operate as partnerships because of the flexibility, favourable tax treatment, and less onerous regulation, which limited companies face. In principle, LLPs firms are not subject to the corporate tax, but rather the members are taxed individually on their share of the profits (MacIntyre, 2018).
Members of an LLP are taxed as partners in a partnership and
are treated as being self-employed. Each member must register
with HM Revenue & Customs (HMRC) as self-employed within
three months of being admitted as a member of an LLP using
form SA401.
Moore Stephens (2018)
This is considered a significant advantage of an LLP over limited companies, which are obliged to pay Corporate Tax on trading profits, investment, and capital gains, before any interim and annual dividends are paid out to shareholders. The normal rate of UK Corporate Tax is 19% for the year beginning 1 April 2020. (PwC, 2021).
However, taxation regimes tend to be very complex in nature, and it is beyond the scope of this article to discuss these advantages in any detail.
Another significant advantage of forming an LLP is the commercial flexibility it gives its members. According to, Chartered Certified Accountants firm RJP, an LLP offers informality and flexibility where partners ‘‘can be appointed and leave with no capital changing hands, and no tax implications arising despite entitlement to a profit share… LLPs are also considerably more flexible than limited companies in the way profits can be allocated between partners year on year’’.
Do not confuse limited partners with members of a limited liability partnership.
Private equity or venture capital fund is typically an English Limited Partnership (ELP) formed pursuant to the Limited Partnerships Act 1907. An ELP must have at least one general partner (GP) and any number of limited partners (BVCA, n.d.). A limited partner is prohibited from taking part in the management of the partnership. If a limited member takes part in the partnership management, he or she loses the right to the limited liability. Their role is, in effect, restricted to the provision of capital.
For example, a limited partner who invested in the private equity fund is not liable for the losses incurred by other partners derived from the fund's poor performance, but only for the capital he or she has already committed.
Formation of LLPs
LLPs are incorporated by registration with the Registrar of Companies at Companies House. Pursuant to section 2(1)(a) of the Act for limited liability partnerships to be incorporated, there have to be at least two members of an LLP who must subscribe their names into the incorporation document. One person cannot set up a company as the LLP. This is one of the differences between an LLP and Ltd, as one person can be both a shareholder and the company director and thus meet one of the requirements to incorporate a private limited company.
S. 2(1)(b) states that the incorporation document or a copy of it must have been delivered to the registrar. S. 2(1)(c) requires submission of a statement made by either a solicitor engaged in the formation of the limited liability partnership or anyone who subscribed his name to the incorporation document, that the requirement imposed by paragraph (a) has been complied with. According to s. 2(2), an incorporation document must state:
• the name of the LLP;
• the location of LLP’s office (England and Wales, Wales or Scotland);
• the address of the registered office;
• the name of the members of the LLP on the incorporation;
• the name of designated members;
• the name of persons with initial significant control over the company
Section 3 provides that once the formalities have been complied with, the Registrar of Companies issues the certificate of incorporation, regarded as conclusive evidence the LLP has been lawfully incorporated.
LLPs do not have shareholders and directors. Instead, they have members and designated members who have duties similar to those imposed on the officers (the director and the secretary) of a limited company, e.g., they must sign the accounts and the annual return (MacIntyre, 2018).
Unlike a company, an LLP does not have the articles of association, which must be publicly filed with the Registrar of Companies. The document prescribes a company regulation and is the principal element of a company constitution (Companies Act 2006, s 17). However, LLPs members will often enter into a members agreement, which sets out their rights and obligations (Macfarlanes, 2014). LLPs do not need to make such agreements available to the public.
Members as agents
Section 6 of the Limited Liability Partnership Act 2000 states that (1) every member of a limited liability partnership is the agent of the limited liability partnership and can therefore make contracts on its behalf (MacIntyre, 2018). There are, however, two main exemptions where the actions of its members do not bind LLP:
• the member, in fact, has no authority to act for the limited liability partnership by doing that thing; as suggested in s. 6(2)(a); and
• third party either knew that the member had no authority to act on behalf of the LLP or did not believe that he or she was a member of the LLP, see s. 6(2)(b).
According to s. 6(4), a member of the LLP who committed a wrongful act during the course of the business of the LLP or with the authority of the LLP (MacIntyre, 2018), is, in fact, liable for these actions to the same extent as the limited liability partnership itself.
Raising capital
So far, we have mainly emphasised the benefits of forming an LLP. There are, however, some disadvantages that should be considered. In general, LLPs have a weaker borrowing power than companies. Public limited companies (plc) can raise capital by selling their shares to the public, whilst private limited companies (Ltd.) can sell their shares to individuals, subject to the articles of association, which may be interested in investing in the company.
LLPs do not have shares to sell and, therefore, cannot receive capital investment from non-LLP members in exchange for a portion of ownership of the business (1st Formation). These companies often have to rely on taking loans from banks and other financial institutions. In many cases, banks will ask for collateral to secure the loan or even personal guarantees from the individual partners (Simmons Gainsford, n.d.). It is a common practice for an LLP to raise capital by granting floating charges over their assets. In other words, LLPs provide an asset as a security for the loan while still retaining all the rights to use those assets. That is made possible if the sale of assets is guaranteed to be higher than the borrowed amount. Thus, if an LLP does not own valuable assets, it could be challenging to raise capital by means of floating charges.
Limited Liability Partnership: Legislation
The main piece of legislation that applies to LLPs is the Limited Liability Partnership Act 2000, ever since 6 April 2001, when the Act came into effect.
However, there have been made numerous amendments to the law that regulates LLPs. Therefore, it is important to consider other relevant pieces of legislation that apply to LLPs today (source: UK Government, updated: 30 December 2020):
Any thoughts?
Since 6 April 2001, individuals have been able to form a limited liability partnership which proved to be very popular so far. Without a doubt, LLPs provide a range of benefits over limited companies and ordinary partnerships and bring a lot more flexibility to the firm's management. An LLP is commonly established by lawyers, accountants, business advisors, surveyors, or financial services professionals. Some notable LLPs in the world include the Big Four accounting organisations (PwC, KPMG, Ernst & Young, and Deloitte), global law firms (DLA Piper, Clifford Chance, Kirkland & Ellis), or financial services firms (Dunedin).
Despite its advantages, an LLP is not suitable for every business. Therefore, it is important to understand both the benefits and limitations that an LLP may present.
Bibliography
Deep, R. (2012). The Emergence of Limited Liability Partnerships [online]. Available at SSRN: https://www.ssrn.com/abstract=2117240
MacIntyre, E. (2018). Essentials of Business Law. 6th edition. Pearson: Harlow
UK Government (2013). The Insolvency Service. History and Legislation Relating to LLPs [online]. Available at https://www.insolvencydirect.bis.gov.uk/technicalmanual/Ch49-60/Chapter%2053A/Part%201/Part%201.html
Wild, C., Weinstein, S. (2019). Smith & Keenan's Company Law. 18th ed. [ebook] Pearson. Available at: https://www.perlego.com/book/955063/smith-keenans-company-law-pdf