Thursday, April 24, 2008

I. Introduction

Limited Liability Partnerships are distinct from limited partnerships, in that limited liability is granted to all partners, not to a subset of non-managing “limited partner”. As a result the LLP is more suited for business where the investors to take an active role in management. Whereas Limited Partnership is kind of partnership in which one or more partners have limited liability and at least one of the partners has unlimited liability. The liability of the limited partner is limited to the extent of his investment in the business. In Pakistan there is no Limited Partnership type of business.

A Limited Liability Partnership ("LLP") is essentially the same thing as a Limited Liability Company ("LLC"), except that an LLP is specifically designed for use by certain professions (for example, accountants, lawyers or architects). Generally the partners in limited liability partnerships aren't responsible for the debts, obligations, or liabilities of the partnership resulting from negligence, malpractice or wrongful acts, or misconduct by another partner, employee or agent of the partnership.

Professional organizations (such as accounting and law firms) generally prefer limited liability partnerships because they are specifically designed to limit malpractice claims against partners not involved in the malpractice. But a partner of a limited liability partnership is liable for other partnership debts and obligations as well as for their own negligence, malpractice or wrongful acts, or misconduct, and that of any person under their direct supervision and control.

There are more administrative duties involved compared to the Partnership business structure. In terms of liability, the Limited Liability Partnership is itself liable for debts run up in running the business, rather that the individual members of the LLP. As a result, LLP's are only recommended for profit running businesses.

Individuals or existing businesses can be members of a Limited Liability Partnership, and the LLP must have at least 2 members. The rights and responsibilities of all members would usually be laid out in a "Deed of Partnership". The LLP would typically select a "Designated Member" (or members) who would be responsible for maintaining communications with Companies House, preparing accounts and acting for the LLP if for some reason it is dissolved further down the line.

II. Forming a Limited Liability Partnership

Limited liability partnerships are formed by either:
filing a certificate with the Secretary of State, or
filing a certificate to convert an existing general partnership to a limited liability partnership.
At least two people “carrying on a lawful business with a view to profit” must subscribe their names to a document called an "incorporation document". The incorporation document must be delivered to the Registrar of Companies at Companies House. A statement must also be delivered to the Registrar that there has been compliance with the requirement that at least two persons, associated for the purpose of carrying on a lawful business with a view to profit, have subscribed their names to the incorporation document. The statement must be made by a subscriber to the incorporation document or a solicitor engaged in the formation of the limited liability partnership.

The incorporation document must include this information: the name of the limited liability partnership, the name and address of the persons who are to be members on incorporation; whether some or all of the members are to be designated members. There is no restriction on the number of members, but at least two must be designated members. A designated member is responsible for certain administrative and filing duties and for the filing of accounts as well as other duties in particular circumstances. Specifically, it is the designated partners who are held liable for the correct filing and recording of the limited liability partnership affairs. It is they too, who will be subject to the criminal penalties of failure to comply. If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member.

An LLP should draw up a "Deed of Partnership" at the time of formation, a legally binding agreement between members which lays out the rights and responsibilities of each party to the agreement. Alongside administrative details such as the names and addresses of members, the deed will also include details on the amount of capital each partner will inject into the business, what their individual roles and responsibilities will be in running the business and what would happen if a partner leaves the business.

There are precise provisions for registration of a limited liability partnership, which are not dissimilar for those for creating a new limited company. However, a person cannot buy an "off the shelf" limited liability partnership as he can a limited company. The original documents have to be prepared with the names of the first set of "real" partners.

The law of “ostensible authority” applies to partner transactions. Every partner is an agent of the limited liability partnership. The limited liability partnership is bound by every contract made by any partner, unless first, the partner had no authority to make the contract and second, the third party was aware of that fact. The limited liability partnership is bound even by contracts by former partners, unless the other party has been told that the former partner is no longer a member, or the registrar has received a notice to that effect.

III. Tax and National Insurance

Limited liability partnerships are run like general partnerships and have a similar degree of management flexibility. Income, losses and gains are passed through to the general partners according to the partnership agreement. If there is no partnership agreement, income, losses and gains will be allocated in proportion to the partnership interests of each partner. Partners can agree among themselves as to how income, losses, and gains are divided among the partners. The partners then report the amount allocated on their own income tax returns and pay tax accordingly.

All profits in a Limited Liability Partnership (LLP) are split between the members. The tax liability falls on the individual members, not the LLP itself. Most members are likely to be self-employed, so all income should be declared via self-assessment. If an LLP member is another business, they will be liable to pay corporation tax on any income they receive from the LLP.
The profits of the business of a limited liability partnership are taxed as if the business were carried on by partners in partnership, rather than by a body corporate. This ensures that the commercial choice between using a limited liability partnership or a partnership is a tax neutral one. There are fair and foreseeable provisions to restrict set off of losses elsewhere against partnership profits of a partner and other anti-avoidance measures.

The transfer of an existing business to a limited liability partnership will not be treated for tax purposes as a cessation of the business of the partnership which is making the transfer unless in identical circumstances a transfer between one partnership and another would do so.

IV. When to use a limited liability partnership

Of all the legislation of the last few years, the “creation” of limited liability partnership is one of the most interesting.

a. Limited liability generally
The essence of a limited liability partnership for practical purposes is as a vehicle to contain a partnership of any size where partners may be at risk from the careless or accidental negligence of a colleague. For example, partners in International accountancy firms would be protected from personal liability if a claim was successfully pursued by a major client. Partners in a construction business would be protected if a new building collapsed, causing high level claims against them.

b. Protection for a non-active lender
A limited liability partnership may also be appropriate for a partnership where some partners are not actively involved. They might have once been called “sleeping” partners. This will suit both a company and an individual lender.

c. Easy in, easy out
The LLP structure is more suitable for a group of people engaging together in a property or finance venture where it may be necessary to account for partners coming and going more frequently than we would expect in a normal partnership business.
V. Direct Partner Liability in LLP

All limited liability partnership ("LLP") statutes provide that LLP partners will be personally liable for their own negligence or malfeasance. In addition, most LLP statutes provide that LLP partners are liable for the negligence, wrongful acts and misconduct of any person under the LLP partner's "direct supervision and control, "although the statutory terminology differs in this regard. The various state LLP statutes do not define what is meant by "direct supervision and control," and this question is left to judicial interpretation. For supervisory liability to be imposed upon a LLP partner, both "supervision and control" must exist, and the mandated supervision and control must be "direct."

It is probable that the LLP statutes contemplate immediate, close supervision and control by a LLP partner, rather than a casual level of supervision or control is contemplated. The direct supervision and control standard should require an intimate involvement in supervision and control in connection with actual work with respect to a matter, rather than mere responsibility for a matter or client. Thus, for example, a LLP partner in an accounting firm who is working on a day-to-day basis in supervising and directing the activities of an employee would appear to have liability exposure. On the other hand, the chair of a department in a law firm, the members of the governing body of law firm or the managing partner of a law firm, who have established general policy for their firms but who are not personally involved in a client representation would appear not to have liability exposure. Similarly, two LLP partners working on a matter independently of each other, neither of whom is viewed as supervising and controlling the other, should be able to argue that since they acted independently of each other, they should not be exposed to liability for the other's conduct. However, the lack of authority on this issue creates risk, which likely will affect the actions of LLP partners.

VI. The Benefits And The Disadvantages of LLP

A limited liability partnership is unlikely to be useful for a small trading company of any sort because a conventional limited company is likely to perform an appropriate role at less cost.
The benefits of a limited liability partnership against a limited company may be:
less public scrutiny because the partnership agreement remains confidential, easier manipulation of shares between partners, easier changes of membership, no administration relating to the issue and allotment of shares, easier expression of administration, roles and management in a partnership agreement.

The disadvantages may be:
lack of certainty as to how the Registrar and the courts will treat limited liability partnerships, lack of a body of law to protect minorities, possibly more “fuss” to administer until staff and advisers are fully conversant with new procedures, If the limited company is insolvent all the loss is the value of its assets.
It may be found a limited liability partnership insolvency more expensive since the amount which might lose is likely to be more. However, this cannot be a hard and fast rule. Each case will depend on its facts. []

1. Qureshi, Fayyaz Hameed and Khurram Abbas Sheikh. LAW OF CONTRACT. Doggar Publisher: Lahore, 2006.

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