Limited Liability Partnerships

Q. When is a partnership not a partnership?

A. When it is a "Limited Liability Partnership" (LLP)

Yes, despite its name, this new entity which came into being on 6th April 2001 is a corporate body and not a partnership, writes Richard Tyler of the Ely office of Whiting & Partners. In fact it combines features of partnerships and companies and will need to be considered as an alternative in future when people are setting up new businesses along with the existing choices of sole trader, partnership, limited company, joint venture, etc. As it is not a partnership the "partners" in it aren't partners but "members".

The initial use will however probably be the transfer of existing partnerships, especially professional partnerships, into this new concept. For a variety of reasons solicitors and accountants have not rushed into forming limited companies but may find this an acceptable alternative. So what are the benefits?

1. The members enjoy the benefit of limited liability;
2. If the LLP enters into a contract it is the LLP that is bound by it and not the partners;
3. The members can all take part in the management, unlike the old style Limited Partnership, without losing their limited liability status;
4. There is no restriction on the number of members;
5. It has its own legal identity unlike a partnership;
6. It is taxed exactly as a partnership therefore avoiding expensive National Insurance charges on the profit shares;
7. Inheritance Tax business property relief is available to the members;
8. The transfer of assets from the old partnership to the LLP is free of stamp duty as long as it is completed within 12 months of incorporation.

Richard warns that there are some disadvantages and may be unsuitable for some and not allowed for others. The final touches are still being made to the Limited Liability Partnerships Act 2000 but it seems almost certain that property owning partnerships will not be able to take advantage of it, nor other non trading businesses. The members will be subject to statutory obligations and can be held liable if they have been involved in wrongful trading. The entity must have an audit, subject to the exemptions given to limited companies, and this can be expensive. The accounts will be subject to a new SORP, not yet finalised but hopefully to be ready by the new year. The disclosures in the accounts will be as voluminous as for limited companies and this will include disclosing the members' remuneration and related party transactions. Will all members be prepared for this?

In summary it will be an important issue for many trading partnerships to consider as an alternative to the current structures. It will be important to involve a knowledgeable solicitor as well as your accountant from the start.