The Debate: LLPs

Just delaying the inevitable

By Mark Lee

Limited liability partnerships were introduced with a fanfare last year. So why have so few accountancy firms become LLPs?

Anderson’s recent difficulties have once again focussed attention on the fact that partners have unlimited liability unless their firm is an LLP.

Despite the ‘camel’ like nature of the LLP legislation, the facility does now exist and is unlikely to undergo much change in the near future.

It was the Big Five firms, together with some of the largest law firms, who were the most vocal of campaigners for the introduction of an LLP structure in England and Wales.

The facility to incorporate as an LLP became a reality on 6 April, 2001.

Since that time well over 1,000 LLPs have been registered at Companies House but take-up among accountancy firms outside the Big Five has been slow. Should we be surprised? I think not.

I believe the apparent disinterest is merely the consequence of two key factors that are delaying the inevitable. Most accountancy firms will only incorporate as an LLP at the start of an accounting period (typically 1 April or 1 May) and after the partners have made time to consider all relevant factors including the recommended creation and adoption of an appropriate members’ agreement. There was no time (for most) to do all this last year and many will still have other priorities this year.

Until the CCAB issues its definitive SORP for LLPs later this year, accountancy firms will not know for certain all of the implications of reflecting their results as an LLP.

Last year’s draft SORP, if adopted without any change, would have resulted in many firms reflecting increased taxable profits and future annuity obligations in their LLP accounts. Some acquisitive firms were also concerned about the potential obligation to reflect future mergers using the acquisition accounting rules.

However, I do not believe all accountancy firms should be planning to convert to LLP status. But I do believe all new start-ups, breakaways and merging practices should seriously consider the advantages of LLP status and weigh these against the perceived disadvantages.

Do not be fooled into thinking that the apparently slow move to become LLPs is because there are any serious flaws in the concept.

I predict we will see a steady stream of accountancy firms converting to LLP status over the next couple of years.

• Mark Lee FCA is deputy chairman of the Tax Faculty and director of tax services at WJB Chiltern plc.

Changing nature of our business
By Nick Pasricha

In the current environment it is hardly surprising that the limited liability partnership is yet again a hot topic.

Last year Ernst & Young was the first professional services firm to convert to LLP status in the UK. It was a natural step for the firm as we have always led the way in openness and transparency. This includes us being one of the first of the Big Five to publish a fully audited annual report and accounts.

The introduction of LLPs is an important step forward in beginning to provide a fair and reasonable measure of protection for businesses such as ours in an increasingly litigious society. The professional services sector has never been under such close scrutiny as it is now.

There is a real danger that LLP status will be perceived as a safe haven to protect ourselves against the ever increasing blame culture and speculative multibillion pound law suits.

It is incumbent on us to explain to our clients, the business community and our critics that being an LLP is a positive move and reflects the changing nature of the professional services sector.

We need to carry out our business in a modern legal framework that enables us to continue to operate on the basis of the successful partnership model whilst affording some degree of individual protection.

The trade-off is that LLPs are open and transparent while benefiting from corporate status and limited liability. I think it is easy for people to forget that in our profession there is real concern that the law was unfair to us.

The doctrine of joint and several liability is pretty harsh. Despite the current economic environment there is still a talent war being fought.

Without our conversion to an LLP I could have seen a time in the future where it would have become difficult to attract the high calibre of person needed to become a partner in a professional services firm.

Being a limited liability partnership will become the norm for the sector in the next five years. However, I would like to see firms converting for the right reasons and not as a knee jerk response to current circumstances.

• Nick Pasricha is managing partner of markets at Ernst & Young.