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Act puts a ceiling on liabilities

If you can be caught decades into the future by latent damages, you need to consider damage limitation as an exercise.

All network contracts have clauses passing on liability for damages usually without time limitation. A latent damage can come back to haunt you decades into the future. The solution to the problem is insurance. But beware – not all insurers will cover all liabilities going forward.

The other option is to look at business vehicles which limit liability.

Until recently, there were only three options – sole trader, partnership and limited company. But the Limited Liability Partnerships Act, starting in April, creates a new legal entity known as an LLP. As an LLP is a body corporate, it will generally be fully liable for its debts, so any member will only have exposure to debts up to their financial interest in that partnership. This is a means of protection which has not been offered in the past.

However, such partners need to be aware that this limitation on their liability will be subject to an additional liability to contribute to the assets of an LLP on its winding up.

As an LLP is not a partnership with limited liability, the law relating to partnerships will not apply unless there is an express provision made to the contrary. Bearing in mind the Partnership Act 1890 is woefully dated, I cannot see a large number of IFA practices continuing to run with a traditional partnership model.

An LLP can be incorporated when two or more people, associated for the carrying on of a lawful business with a view to profit, subscribe their names to an incorporation document. This document should be delivered to the Registrar of Companies and follow the procedures laid down for incorporation in section 1 of the act.

Upon receipt, the registrar will issue a certificate of incorporation. The initial members will be those persons who have subscribed their name to the incorporation document and any other person may become a member in accordance with an agreement with the existing members.

The members of the LLP will act as partnership agents so that, instead of obligations accruing in the joint names of the individual members, they will accrue in the name of the LLP. The only personal liability the partners will be subject to will be that outlined above in relation to their financial contributions and/or in respect of their own wrongdoings. This element of protection against “loose cannon” partners will be welcomed.

The act was essentially brought in to assist big partnerships where it is impossible for each and every partner to know the dealings of their fellow partners. Due to the feelings of lack of control by other partners in this situation, such firms were looking for a way to limit their liability.

The other major thrust behind the act is the likely creation of multi-disciplinary partnerships in the future. The major professional bodies do not permit such arrangements but the LLP looks likely to be the favoured structure when multi-disciplinary partnerships finally arrive.

The last act which attempted to limit the liability of partners was the Limited Partnership Act 1907. This only allowed “sleeping partners” to limit their liability to the value of their original investments and was of no use to firms which had active partners who wished to limit their liability.

Partnerships which view the lack of control over each partner&#39s potential exposure as a problem have previously only had the option of converting the partnership into a private limited company.

The disadvantage with this course of action is the increased formality required by Companies House and also the fact that personal details of both the company&#39s offices and of the company itself should be on an appropriate register at Companies House. There is also always a danger that the veil of incorporation can be lifted to expose company members to liability.

The structure provided by LLPs will be of value to small firms, in particular. However, such businesses may think the greater exposure to liability on choosing an LLP over incorporation as a private limited company may not be outweighed by the savings that can be had by not having to comply with the filing requirements at Companies House.

Remember, the whole purpose of using such an arrangement will be defeated by signing limitless personal guarantees. These agreements would be the ones that potentially call personal assets into question in the future. I would urge all people who are invited to sign personal guarantees to request a limitation both in time and value.

The need to be clear about what potential liabilities need to be protected against is an analysis which financial planning practices need to undertake. It is time to consider how best to move forward to ensure that business protection and the option of a worry-free life outside financial services are possible.

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