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Elements of risk

Last week, I began to describe a new corporate entity which is expected to come into force early next year following the Limited Liability Partnerships Act 2000 receiving Royal Assent recently.

Limited liability partnerships will allow members to limit their liability while organising themselves internally as a partnership. They are exp-ected to be particularly popular with the professional business community.

Under current law, the Partnership Act 1890 provides for the joint and several liability of partners. This has the effect that, should one partner incur a business obligation, all the partners are liable to contribute to the extent of their personal assets.

Subject to the satisfaction of certain conditions, partnerships can have partners with limited liability, provided at least one of the partners has unlimited liability. However, with the emergence of the limited liability partnership, this important condition has been dispensed with.

As I stated last week, the LLP offers a halfway house between partnership and company status. Publication of accounts giving a true and fair view of the business activity will be necessary, so the new structure will be more like a company from this standpoint.

Partners will be taxed under Schedule D, with National Insurance contributions being paid on a self-employed basis. This is a very important issue and one which advisers will need to be clear about when advising LLP clients on tax planning and pensions.

LLPs will be supervised by a recognised regulatory body.

For financial services practitioners with clients who adopt this business structure, a key issue to remember will be the corporate nature of this new type of partnership. The LLP will be a separate legal entity, which means it can do anything a natural person can do. It has the ability to enter into contracts and hold property, and will continue in existence despite any change in membership.

The LLP&#39s existence as a separate legal entity makes it more closely akin to a company than a partnership except in so far as the internal relations are governed by agreement between the members and, of course, in respect of its tax treatment.

The underlying approach, therefore, has been to draw on the principles set out in the legislative treatment of companies. This would appear to mean the LLP can contract in its own right for products such as life insurance and pension products. This would certainly throw a different light on partnership insurance for this new type of partnership.

For business succession (share purchase) insurance, the solutions will probably remain the same. The individual partners will arrange so-called partnership share pur-chase cover at the appropriate time between themselves – say, on the critical illness of a partner – and between the surviving parties and the deceased partner&#39s personal representatives if the purchase is to take place following the death of a partner.

The status of an automatic accrual arrangement used in this context will need to be reviewed closely after the new act has been carefully studied.

As the LLP will have contractual capacity, this will make it possible for keyperson insurance to be effected by the business itself if this is appropriate. Where the life to be assured is a partner, it is likely that an additional amount of cover will be added to the personally-arranged partnership share purchase cover.

Where the key person is an employee, however, effecting a policy on the life of that key employee will be easier than for an ordinary English partnership given the LLP&#39s status as a separate legal entity.

For non-LLP partnerships, it is necessary for a partner or partners to effect the keyperson policy on a life-of-another basis for the benefit of the partners for the time being in appropriate shares. A trust is the most obvious way to achieve this objective.

The profits of the business of an LLP will be taxed as if the business were carried on by partners in partnership, rather than by a body corporate. This ensures the commercial choice between using an LLP or a partnership is a tax-neutral one.

The taxation provisions in the act are expressed in broad terms so the existing rules for partnerships apply to LLPs and members of LLPs which are carrying on business, as if these were partnerships and partners respectively.

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