IFAs trading as partnerships can gain valuable personal protection by converting to a limited liability partnership. Although the FSA has not yet produced specific rules for LLPs, it will generally treat an IFA LLP as a limited company.
To assess whether it is advisable to change status from a partnership to LLP, consideration needs to be given to the benefits and disadvantages of such a change.
What is an LLP?
It is an entity that has been designed to share characteristics with limited companies and partnerships. It is a body corporate and as such has a legal personality distinct from its members.
As a body corporate, it has unlimited legal capacity and so it can own property, employ staff, sue and be sued and contract with third parties in its own name.
It must consist of two or more persons associated for carrying on a lawful business with a view to profit. In law, a “person” includes individuals and companies. LLPs are not available for non-profit-making organisations/charities/ clubs, etc.
Members of the LLP are agents of the LLP and not of each other. Their fiduciary duties are owed to the body corporate but not to the other agents. As agents of the LLP, members are not exposed to the unlimited liability position of a partnership.
A member's financial exposure resulting from the misdeeds of fellow members is therefore capped. It is not governed by a partnership agreement or memorandum or articles of association but instead by a members agreement which can be tailor-made for each LLP. It can continue in existence independently of changes in membership.
Protection against liabilities
The potential length of time during which claims can be brought against the partnership is long.
As a very general rule, claims are less likely to arise the longer the time has elapsed since a transaction was entered into or advice given.
The law of limitation states that claims must be brought within six years of the act giving rise to the loss being committed or, alternatively, within three years of the claimant becoming aware of the act or circumstances giving rise to the claim, whichever is the longer.
The limitation period is subject to a 15-year maximum, apart from in cases of “deliberate concealment” which is generally und-erstood to mean cases of fraud or dishonesty.
In the event that a court found there was “deliberate concealment”, then any limitation period would not start to run until the clai-mant became aware of that deliberate concealment or could have discovered the deliberate concealment with reasonable diligence.
For example, in the event that an adviser recommended that an investor take out an unsuitable investment which subsequently proved to be unprofitable, the six-year limitation period would run from the date of advice.
The three-year limitation period would run from the date when the investor bec-ame aware that the advice may have been unsuitable or that he or she had suffered a loss. The 15-year longstop would be 15 years from the date the advice was given.
As partner's liability for business written is retained by him and his partners personally. Exposure to such liabilities can last a long time.
If the business is incorporated, the partnership and the individual partners will still keep the liabilities for business already written.
However, if they intend to be in business for, say, 20 years and after 10 years they incorporate into an LLP, then they will have halved their personal liability over the term of their business life.
The first 10 years of liability will be that of the individual partners but the second 10 years will be the liability of the LLP.
Although it is not possible to remove personal liability retrospectively, there is clearly an advantage in limiting liability for the future.
The aim has been to combine the best features of partnerships and companies. An LLP's central benefit is to allow those involved in management to enjoy limited liability while providing the internal flexibility of a partnership structure.
That it has unlimited legal capacity and can continue in existence independently of changes in membership allows for a more flexible vehicle than a partnership. There is no need for the regulated management structure imposed upon a company and the vehicle will benefit from this.
The LLP will be regulated by its own membership agreement and is free to structure its management as it feels fit.
Members will not be jointly and severally liable in either contract or tort for the acts of any other member of the LLP simply by virtue of their membership of the LLP. Each individual's liability is limited.
As a separate legal entity, claims will be made against the LLP itself to the full extent of its assets. Unless otherwise agreed, members of an LLP are not required to contribute to the assets of the LLP if (in the event of a claim) those assets prove to be insufficient. In other words, the member's personal assets are ringfenced.
In return for LLP status, UK LLPs will have to accept a higher degree of financial transparency. LLPs will be required to disclose publicly their audited accounts and the remuneration levels of the highest-paid member along with personal details, names, addresses and dates of birth of all members by filing this information in their annual return at Companies House.
This may affect client perceptions of an LLP. What may be of concern is the publication of accounts where an LLP is performing badly.
Banks and credit managers rely on information available at Companies House to determine creditworthiness. A member's interest in the LLP remains at risk plus any additional exposure arising from per-sonal guarantees.
As there is a requirement to produce audited acc-ounts, you may need to change accountants if the present accountants used by you are not able to produce audited accounts.
There are no specific capital-adequacy requirements for an LLP set out in IPRU13. The capital-adequacy requirements for an LLP are those of a limited company making the necessary changes of share capital to members' capital.
The effect of this is that an IFA's personal assets cannot be taken into account but only property which belongs to the LLP.
How to form an LLP
An LLP has to be registered with Companies House and with the FSA. The main document on incorporation is the incorporation document (form LLP2). It requires the name of the LLP, the address of the registered office the name and the address and date of birth of each member
There is a £95 fee on registration. A minimum of two designated members at all times is required. Designated members have additional responsibilities over members such as signing and delivering accounts to Companies House.
Failure to file accounts is a criminal offence and is subject to a fine. There is a duty to prepare a balance sheet and profit and loss account on a “true and fair” basis.
It is a private document and does not need to be filed at Companies House. It should cover the duration, members' financial contributions, profit-sharing ratios, voting arrangements, conduct of members, joining of new members, retirement of members and expulsion issues
If there is no membership agreement, relations between the members will be governed by the implied default regulations made under delegated legislation. These provide for equality of ownership of assets and profits and equality of decision-making.