The DTI released the long awaited draft legislation on limited liability partnerships ("LLPs") for consultation in September. As a result LLPs could be available in the UK as early as next summer for those partnerships which qualify.
The legislation is in part a response to pressure from large accountancy firms who threatened to register abroad as Jersey LLPs, but it is also intended to keep UK law in step with modern international commercial practice. The aim of the proposed legislation is to allow professional partnerships to trade with limited liability whilst retaining the organisational flexibility of a partnership, in particular the partnership basis of taxation. The consultation document states that the general intention is that "...the LLP will have the internal flexibility of a partnership with external obligations equivalent to those of a company".
The precise scope of firms which may qualify as UK LLPs is not yet clear. However, it seems likely that LLP status will only be available to firms which are regulated by certain supervisory bodies.
The main features
The liability of non-negligent partners will generally be limited to their financial stake in the firm. Their personal assets will be protected as if they were a director of a limited company. However, a negligent partner will remain liable for "...the utmost farthing of his property for all his debts and engagements of the firm." LLP partners will also, like directors, be personally liable for wrongful trading or fraudulent trading and they will face disqualification for misconduct in the same way as directors. In return for the benefit of this limited liability, LLPs will have to disclose audited accounts and other information similar to that provided by companies.
The LLP will be taxed under the existing regime for partnerships as opposed to the less favourable regime for companies, and will not be subject to the same internal organisational restraints that apply to limited companies.
One of the main concerns of the DTI has been to protect creditors in the event of insolvency. LLPs in Jersey, for example, are required to maintain a bond of £5 million. However, the DTI rejected both this concept and the idea that LLP partners should be made to give a personal guarantee to make good a deficit of assets below a specified sum on liquidation.
LLPs will be subject to insolvency rules very similar to those which currently apply to existing limited companies. The draft legislation has been slightly watered down with respect to provisions enabling a liquidator to claw-back money for creditors if partners paid themselves excessive profits in the two years before an insolvent firm was wound-up. But it remains the case that an LLP partner who has made drawings within two years before liquidation at a time when there were reasonable grounds for believing that the LLP was, or was about to become, insolvent may be made to make a contribution to a shortfall in assets.
In summary UK LLPs will exhibit external consumer-protecting characteristics similar to those of a limited company and the internal flexibility and tax treatment of a partnership.
How will partnerships respond?
LLPs are expected to prove extremely popular with eligible firms. It is predicted that the big accountancy firms will rush to obtain UK LLP status as did their US counterparts when the option became available to them. Financial disclosure remains a drawback, but the signs are that many partnerships are coming to the conclusion that they can live with such disclosure in return for limited liability status.
It remains to be seen how other qualifying professions will respond. They will need to consider carefully the impact of disclosing their financial details to both their clients and their employees. But partnerships who blanch at the prospect of disclosing financial details may find themselves under pressure to "join the club if they have nothing to hide" if their competitors opt for LLP status.
For further information please contact Ian Greenfield, e-mail: Click Contact Link , 2 Park Lane, Leeds LS3 IES, UK, Tel: +44 113 284 7000
This article was first published in the Winter 1998 Hammond Suddards Corporate Finance Newsletter Update
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
The legislation is in part a response to pressure from large accountancy firms who threatened to register abroad as Jersey LLPs, but it is also intended to keep UK law in step with modern international commercial practice. The aim of the proposed legislation is to allow professional partnerships to trade with limited liability whilst retaining the organisational flexibility of a partnership, in particular the partnership basis of taxation. The consultation document states that the general intention is that "...the LLP will have the internal flexibility of a partnership with external obligations equivalent to those of a company".
The precise scope of firms which may qualify as UK LLPs is not yet clear. However, it seems likely that LLP status will only be available to firms which are regulated by certain supervisory bodies.
The main features
The liability of non-negligent partners will generally be limited to their financial stake in the firm. Their personal assets will be protected as if they were a director of a limited company. However, a negligent partner will remain liable for "...the utmost farthing of his property for all his debts and engagements of the firm." LLP partners will also, like directors, be personally liable for wrongful trading or fraudulent trading and they will face disqualification for misconduct in the same way as directors. In return for the benefit of this limited liability, LLPs will have to disclose audited accounts and other information similar to that provided by companies.
The LLP will be taxed under the existing regime for partnerships as opposed to the less favourable regime for companies, and will not be subject to the same internal organisational restraints that apply to limited companies.
One of the main concerns of the DTI has been to protect creditors in the event of insolvency. LLPs in Jersey, for example, are required to maintain a bond of £5 million. However, the DTI rejected both this concept and the idea that LLP partners should be made to give a personal guarantee to make good a deficit of assets below a specified sum on liquidation.
LLPs will be subject to insolvency rules very similar to those which currently apply to existing limited companies. The draft legislation has been slightly watered down with respect to provisions enabling a liquidator to claw-back money for creditors if partners paid themselves excessive profits in the two years before an insolvent firm was wound-up. But it remains the case that an LLP partner who has made drawings within two years before liquidation at a time when there were reasonable grounds for believing that the LLP was, or was about to become, insolvent may be made to make a contribution to a shortfall in assets.
In summary UK LLPs will exhibit external consumer-protecting characteristics similar to those of a limited company and the internal flexibility and tax treatment of a partnership.
How will partnerships respond?
LLPs are expected to prove extremely popular with eligible firms. It is predicted that the big accountancy firms will rush to obtain UK LLP status as did their US counterparts when the option became available to them. Financial disclosure remains a drawback, but the signs are that many partnerships are coming to the conclusion that they can live with such disclosure in return for limited liability status.
It remains to be seen how other qualifying professions will respond. They will need to consider carefully the impact of disclosing their financial details to both their clients and their employees. But partnerships who blanch at the prospect of disclosing financial details may find themselves under pressure to "join the club if they have nothing to hide" if their competitors opt for LLP status.
For further information please contact Ian Greenfield, e-mail: Click Contact Link , 2 Park Lane, Leeds LS3 IES, UK, Tel: +44 113 284 7000
This article was first published in the Winter 1998 Hammond Suddards Corporate Finance Newsletter Update
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
