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What are limited liability partnerships all about?
Limited liability partnerships (LLPs) are the fastest growing type of legal entity being incorporated in the United Kingdom. This means that the firm you work for and many of your clients may be thinking about becoming LLPs or may already have done so. The format that an organisation takes affects its internal structure and taxation and, in turn, many of its commercial decisions.
As of 6 April 2001, the Limited Liability Partnership Act 2000 made the LLP structure available to organisations of two or more members with a view to making a profit. Despite the name, there are no partners. Rather, the individuals are members.
The main features of an LLP are that: it is a separate legal entity; the members enjoy limited liability; it is taxed as a partnership; there is organisational flexibility; and designated members are 'in office' rather than being directors.
Why would an organisation want to form an LLP?
A major advantage is the limited liability of the members. This will be limited to an amount agreed in the LLP agreement and, in effect, could be nil. This can of course be a great comfort to the members, especially if for example the LLP becomes insolvent or is subject to a negligence claim.
In addition, an LLP enjoys internal flexibility. Members can participate in management and maintenance of the partnership ethos, which is for many organisations an essential element of the organisation. On the other hand, a company does not share this same internal flexibility, although it can offer its members limited liability.
Why hasn't everyone converted?
There are numerous elements of the LLP structure that will not appeal to some organisations. For example, financial information must be disclosed and, as such, removes the attractive element of privacy available to partnerships. In addition, the structure is still quite new and the legal uncertainty that this causes is undesirable to commercial entities. It is also desirable for an LLP to have an LLP agreement. This can be a very expensive and lengthy task, and is something that can be avoided if the company format is used.
The LLP structure will appeal to some but not all of the organisations that you come across. The most important point to appreciate when advising or dealing with organisations is that there is now a third option available to them, which incorporates features of both the traditional company and partnership format.
Nikki Prater is a first-year trainee in Browne Jacobson’s Insurance & Public Risk Department.