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Free Law Essays - Company Law

Limited Liability Partnerships

This study will explore and discover the meaning plus the role of the new legal entity called a 'limited liability partnership'. This study will contemplate an indepth analysis of the provisions of the Limited Liability Partnerships Act 2000 and how they apply to a limited liability partnership. The full legal make-up of a limited liability partnership will be duly analysed. This will take into account the manner in which they are run and how that differs in any way from a normal business which is not a limited liability partnership. The fact that limited liability partnerships seem to be a very much so welcome development for all businesses in both the commercial and corporate sector will also be considered indepth.

The purpose of this study is to discuss the following quote and make reference to as many of the requested sources as is reasonably possible. The quote states:

The new legal entity, created by the Limited Liability Partnerships Act 2000, is a welcome development for all businesses, whatever sphere of activity they happen to be engaged in.

The first point of reference in this study is to provide a clear and concise definition of what a limited liability partnership is. A limited liability partnership is defined as being a body corporate with a legal personality separate from that of its members. It is formed by being incorporated under the Limited Liability Partnerships Act 2000. A limited liability partnership has unlimited capacity. Generally, partnership law does not apply to limited liability partnerships.

Limited liability partnerships are a separate legal entity and as such they have their own characteristics and key features. Brenda Hannigan states that the key features of a limited liability partnership inlcude the following. She states that it is a body corporate which is a separate legal entity which is distinct from its members. It may own and hold property and it may employ people and it can enter into contractual obligations. Any debts that may be incurred by its members are the debts of the limited liability partnership. Hannigan states that a limited liability partnership has an unlimited capacity. This means that third parties will have no need to harbour any concerns they may have regards restrictions on the activities of the limited liability partnership. A limited liability partnership has members but it does not have any directors or shareholders. It does not have any share capital. This means that it will not be subject to the company law rules that govern the maintainence of such capital. Hannigan points out that the members of a limited liability partnership have a limited liability but the limited liability partnership itself is liable for all the debts incurred to the full extent of its assets. She states that it is important to note that the limited liability partnership has complete flexibility regards its internal structure which it has chosen to adopt. In a limited liability partnership there is no need for any board meetings or general meetings. There is no decision making by way of resolutions. A limited liability partnership does not have a memorandum of association or any articles of association. Hannigan also states that as the members have limited liability the protection of those dealing with a limited liability partnership requires that the limited liability partnership maintains accounting records, prepares and delivers audited annual accounts to the registrar of companies, and submits an annual return in a similar manner to companies. Hannigan does stress that the exemptions that are available to companies also apply to limited liability partnerships.

Slorach and Ellis state that the popularity of private limited companies as business media can best be attributed to one thing namely the availability of limited liability for the owners and managers. They do state that the trade-off is public disclosure of much of what the company does together with a complex regulatory regime.

It is important to note that one of the main disincentives to setting up in business in the form of a partnership is the fact that each partner is exposed to and must face up to the liabilities of the partnership. Every one of the partners who makes up a partnership will be liable for any of and all the liabilities of the partnership, which can be tortious or contractual liabilities, and there is no limit on any such liability. There have been a number of large partnerships which have reserved grave concerns for having such liability especially where the work which they are undertaking or advising on may run to monetary values which are in the millions and possibly billions. Slorach and Ellis state that with clients becoming increasingly litigious in relation to their advisers the threat of a massive claimis ever present.

Slorach and Ellis state that it is against this background that the concept of limited liability partnerships has been introduced by the Limited Liability Partnerships Act 2000. It is important to note that the Limited Liability Partnerships Act 2000 does not act to replace the already existing rules governing partnerships as provided for by the Partnership Act 1890. The Limited Liability Partnerships Act's main purpose was to create a new form of legal entity.

There is still the possibility that a busniess may run and be operated as what is known as a traditional partnership. Limited Liability Partnerships have been made available to any types and forms of business and are by no means limited to professional partnerships. Finally, Slorach and Ellis note that the key rationale for the creation of the limited liability partnership is to allow entrepreneurs the protection of limited liability while preserving the flexibility of the partnership structure. It would be fair to say, at this point, that limited liability partnerships can best and fairly be described as being a 'hybrid of both companies and partnerships'. The essential feature of a limited liability partnership is that it combines the organisational flexibility and tax status of a partnership with limited liability for its members. This limited liability is only possible because a limited liability partnership is a legal person separate from its members.

The Government's desire is that the limited liability partnership will be separate legal entity with unlimited capacity. This means that a limited liability partnership can do anything that a natural person can do. A limited liability partnership now has the ability to enter into contracts and can hold property and it will be able to continue its existence despite of any change in its membership. In the opinion of this commentator, it would appear that the existence of the limited liability partnership as a separate legal entity makes it more closely related to a company that partnership because the internal relations of the limited liability partnership are governed by agreement between its members. It is important to note that the very existence of limited liability partnerships as coporate entities has effected the general law in that it is different in comparison with a partnership. The best way of illustrating this difference is through the use of the following example. A third party will contact the limited liability partnership itself rather than have contact with an individual member of the limited liability partnership whereas a partner in a partnership will contract as the principal for and on the behalf of the other partners in the partnership.

If a partner acts negligently whilst working for one of the partnership's clients there will be, as previusly stated, two causes of action against that partner. The causes of action will be either in contract or in tort. As the limited liability partnership is a separate legal entity with which the client has contracted the only action available against the member will be an action in contract.

In Williams and another v. Natural Life Health Foods Limited and Richard Mustlin the court considered the position when dealing with a member of a limited liability partnership whose negligent conduct directly resulted in econmic loss for the client. The court felt that it could make a decision which was to be seen as being certain. In this case, the defendant was a limited company set up by its managing director and principal shareholder Richard Mustlin to franchise retail health food shops which the plaintiffs approached with a view to obtaining a franchise. The plaintiffs were given detailed financial projections, to which Richard Mustlin had made a substantial contribution, and a brochure giving an extremely positive impression of both the company and Richard Mustlin. The plaintiff, however, had had no dealings with Richard Mustlin and the precontractual negotiations had been conducted by one of the defendant's employees. The plaintiff entered into a franchise agreement with the defendants. However, the plaintiff's shop ceased trading after incurring substantial loses. The plaintiff brought an action against the defendant for damages for losses suffered as a result of the defendant's negligent advice. Richard Mustlin was subsequently joined as defendant and, after the defendant company was dissolved, the action proceeded against Richard Mustlin alone on the basis of an assumption by him of personal responsibility towards the plaintiff. The court ruled in the plaintiff's favour at first appeal. Richard Mustlin appealed against the dismissal of his own appeal against the judge's ruling that he was personally liable to the plaintiff for damages. Richard Mustlin's appealed was allowed as the plaintiffs were not able to show that there had been a reasonable amount of reliance on an assumption of personal responsibility by the defendant.

In this particular case the court came to the following decision. The court applied an objective test which required consideration of things said or done by the defendant or on his behalf in dealing with the plaintiff. The court ruled that when deciding whether such a member was potentially liable to a client, it would have to have regard to a number of factors including whether or not the member of the limited liability partnership assumed personal responsibility for the advice or whether or not the client relied on the assumption of responsibility and whether or not making such a reliance was reasonable. Therefore, the court must make its decision based on these three factors.

At this point there are still several important points as regards to limited libaility partnerships that require discussion and analysis. The internal relations of a limited liability partnership must be the first of the aforementioned points for discussion. On careful analysis of the internal relations of a limited liability partnership it would appear that there is a parallel that can be drawn with the system that operates for partnerships. The members are not obliged to enter into a formal agreement between themselves and they are not obligated to publish any agreement which they chose to enter into. It is fairly usual in limited liability partnerships that the members manage the business. The members can also delegate responsibilities to the employees of the limited liability partnership. The members of the limited liability partnership must raise money either out of their own assets or by way of taking out loans.

The final point to be considered before it is decided whether or not limited liability partnerships are a good thing or a bad will the position regards taxation of limited liability partnerships. The business profits of a limited liability partnership are taxed as if the business is being carried on by partners in a partnership rather than by a body corporate. This has ensured that the commercial choice between choosing to either be a limited liability partnership or partnership is a neutral one as far as tax is concerned.

The Limited Liability Partnerships Act 2000 provides that the exisiting taxation rules for partnerships also apply to limited liability partnerships and the members thereof who will be deemed to be carrying on a business as do partnerships and the partners thereof. Where a business wishes to change to being a limited liability partnership such a transfer is treated for tax purposes as giving rise to a cessation of the business of the partnership. This will theoretically make the transfer identical to a transfer between two other partnerships. It is important to note here that the transfer of assets between a partnership and a limited liability partnership will attract either a chargeable gain or capital allowance consequences if the transfer is deemed to be the same as a transfer between two other partnerships. There are also concessions, as provided for by the Inland Revenue, which will be applicable to limited liability partnerships and their members as they are to partnerships and their partners.

At this point it is now important to ascertain what the opinion of other commentators is as regards to the success or failure of limited liability partnerships in terms of being a welcome development for all businesses irrespective of what business activity in which they are involved. Slorach and Ellis have reached the conclusion that the introduction of the limited liability partnership has had quite a profound effect upon the way people carry on business in this country. They state that a limited liability partnership may be chosen in preference to starting up a new company simply because if the client wishes to operate a small, closely-held business then the option of forming a limited liability partnership is a considerably attractive one.

Slorach and Ellis do gon on to constructively criticise the legislation. They describe the governing law as an unhappy amalgam of two regimes which are based on diametrically opposed premises. They go as far as to express their own opinion in saying that they feel that Parliament has put together the front end of a sports car with the back end of an estate car in order to produce a saloon car. Slorach and Ellis conclude by stating that they foresee the choice of running a business through the medium of a limited liability partnership as being a speculative act because there are a number of fundamental problems to be overcome.

Eastlake and Lewis state that both law firms and accountancy firms have been allowed to enter into limited liability partnerships. They state that even though they have been seen to be quite desireable the limited liability partnership vehicle involves the creation of a separate legal entity which is distinct from the partners. They state that it is this legal party which own assets and undertakes all liabilities but, as with traditional partnerships, the banks will probably still insist on personal guarantees. They disagree with the view that only the partnership can be liable for all liabilities. They are of the view that the partners could be held personally liable in the same circumstances in which directors of companies can be held liable but this will only be the case where there is a serious negligent wrongdoing. They are of the view that no matter what form of partnership exists the partners will still eventually be liable and that the introduction of these partnerships has changed nothing.

Finally, the Law Commission are of the view that even with the limited liability of limited liability partnerships comes the price of control to which general partnerships are not subject. Hannigan is of the view that there will only be a modest uptake of limited liability partnerships in the long term.

BIBLIOGRAPHY

• Business Law - 9^th Edition by Scott Slorach and jason Ellis. Published by Blackstone Press in 2001.
• Halsbury's Laws of England Vol. 35 Partnership Part 6 - Limited Liabililty Partnerships.
• Current Law Yearbook 1998 - Paragraph 3920 Pg. 1383-1384.
• Limited Liability Partnerships Act 2000 Sections 1-12.
• Limited Liability Partnerships by Brenda Hannigan. Published in Regsiter Issue No 56 in October 2003.
• Partnership Law: A Joint Report. Law Commission No. 283 and Scottish Law Commission No. 192.
• In the firing line. Does becominga limited liability partnership make any difference to clients? - by Penny Lewis and John Eastlake. Solicitors' Journal 5^th March 2004.
• Limited Liability Partnerships - A Chance for Peace of Mind - Business Law Review November 2000.
• The Limited Liability Partnerships Bill: a new legal entity poised to enter onto the commercial stage - Company Lawyer - 2000 - Volume 21 Issue No. 4 at page 133.
• Protection for partners from unlimited liability in certain circumstanes? - Company Lawyer 2003 Volume 24 Issue 3 at page 86.
• Liability for negligent mis-statements and the Limited Liability Partnerships Act 2000 Company Lawyer - 2001 - Volume 22(2) at pages 58-59.
• The Limited Liability Partnerships Act 2000 - 2001 - 151 New Law Journal 226.
• Limited Liability Partnership - A New Lifeform? - by Alastair McIntyre of Golds Solicitors. Published in October 2002.

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