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Take it to the limit

Most financial planners will be aware that the two business structures most commonly used in the UK – leaving aside the sole trader – are the partnership (an unincorporated body) and the company (by definition an incorporated body).

Subject to the satisfaction of certain conditions, partnerships can have limited partners – that is, partners with limited liability – provided at least one of the partners has unlimited liability.

Such business structures have been seen in the context of some of the film funding partnerships where, typically, “unconnected” investors will have had limited liability.

Well, there is now a new kid on the block after the Limited Liability Partnerships Act 2000 received Royal Assent recently. The act introduces a new corporate entity, the limited liability partnership, which will allow members to limit their liability while organising themselves internally as a partnership. This is expected to be particularly popular with the professional bus-iness community.

Competition and consumer affairs minister Dr Kim Howells said: “I am delighted that this act has received Royal Assent. It is the result of extens-ive consultation and close and careful scrutiny by a wide variety of interested individuals over the past three years.

“I believe we have created a new business vehicle that takes account of the changing business environment. I know it will be welcomed by many firms, particularly professionals such as lawyers, accountants and actuaries.

“Limited liability partnerships may also prove attractive to start-up businesses. This is because the structure of an LLP offers members the freedom to arrange their internal relationships as they wish while having the benefit of limited liability.”

Dr Howells added: “I would like to stress that we have been careful to take account of the interests of those who will be doing business with limited liability partnerships.

“We will apply, through regulations, the provisions of the Companies Act 1985 and Insolvency Act 1986 with appropriate modifications. In particular, there will be a requirement for financial disclosure equivalent to that required of a company, members of an LLP can be sued for wrongful and fraudulent trading, as can company directors, and there will be specific provisions to protect creditors from the siphoning off of funds by members. Members will be subject to possible disqualification as is the case for company directors.

“I believe the act achieves the right balance between creating a flexible and attractive entity and applying appropriate safeguards to protect those dealing with it.”

The next stage will be to lay accompanying regulations, which is expected to take place next month. The first LLPs are expected to come into force early in 2001.

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.

The Limited Partnerships Act 1907 only permits a partner to limit his personal liability for the firm&#39s debts if he takes no part in the management of the business and there is also a partner who does not have limited liability.

This situation has caused increasing concern as the size of partnerships has grown. In a modern business environment, it is often very difficult for all the partners in a big partnership to be known to one another. An LLP will be a body corporate and will enable firms to restrict liability to the assets of their business. Safeguards comparable to those of a company are being applied to LLPs.

Thus, the limited liability partnership offers a new alternative to the two long-standing business structures in the UK – the partnership and company. Of course, as stated above, limited partnerships have been able to exist for many years but the important condition that has existed to date – that at least one partner must have unlimited liability – has been dispensed with. As a result, the act holds out the prospect of providing a different vehicle through which to trade.

The LLP offers a halfway house between partnership and company status and many partnerships considering incorporation may wish to consider using an LLP as an alternative trading vehicle. Under an LLP, there will be valuable protection from the acts of other partners although partners can still lose their business.

Next week, I will look further at the structure of LLPs and consider how they will fall under the arrangements for keyperson insurance.


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