The LLP has been presented as a modern solution to the problems faced by large professional firms which feel they have outgrown the archaic restrictions of the 19th century law of partnership, and also as a modern hybrid combining the internal flexibility of the partnership with the legal protections provided by the limited company.
Given that the big accountancy firms played a significant part in the development of the LLP it was always expected the larger firms would lead the rush to secure LLP status. With a handful of exceptions, however, firms have been slow to commit themselves publicly.
The LLP addresses problems which ensue from two key features of the Partnership Act 1890. The first is that the partnership does not have legal personality: it is a network of relationships between individual partners. Each partner is an agent not of the firm but of their fellow partners. The second is that each partner is jointly and severally liable for loss caused to third parties as a result of the wrongful acts or omissions of any partner acting in the ordinary course of the firm’s business.
Where a partnership is small, with a clear field of operation, these key features may not cause too much difficulty. Where the firm is large, with geographically-dispersed partners and highly specialised fields of operation, the idea that each partner is personally liable for the acts of his fellow partners is more problematic.
The LLP establishes the firm as a corporate body with separate legal personality. Each member is the agent of the LLP, in the same way as a director is an agent for their company. Crucially too, the personal liability of the members of an LLP is limited to whatever figure they agree to be responsible for.
Most accountancy firms are used to operating as partnerships and are familiar with company law. The collection of partnership and company rules that apply to LLPs will not, therefore, cause particular difficulties.
Firms are likely to have more difficulty in adapting to the fact that, as LLPs, they would have to prepare and disclose information on their own affairs.
Rules in the Companies Act regarding the preparation, audit and filing of annual financial statements will be extended to LLPs. Certain changes to the standard disclosure rules are made. For example, all references to share capital are removed and replaced by provisions concerning members’ loans and profit shares. There will be a special requirement, where an LLP’s profit exceeds #200,000, to report the amount of profit attributable to the member with the largest entitlement to profit under the firm’s in-house agreement.
The reporting exemptions and modifications in the Companies Act will also apply to LLPs, so a company and an LLP of the same size would have similar accounting and auditing obligations. While LLPs will have to publish certain information, they will not have to publish the equivalent of their partnership agreement, assuming they have one, and they will be free to organise their internal affairs in whatever manner they see fit. Some will see the extensive reporting obligations as being a serious drawback.
More substantially, firms will weigh up the implications for individual partners of the creditor safeguards contained in the act.
The wrongful trading provisions of the Insolvency Act 1986 are extended to LLPs, meaning that, when an LLP goes into insolvent liquidation, its members may be made personally liable if they knew or ought to have known that their firm was heading for insolvency and did not take appropriate action.
In addition to this, and more controversially, there is a brand new provision for a liquidator to ‘claw back’ any withdrawal of funds made by a member of an LLP in the two-year period leading up to the firm’s liquidation if, at the time of the withdrawal or as a result of it, he knew or should have concluded that the firm could no longer pay its debts.
What flows from this is that members will be subjected to comparable standards of skill and care to those imposed on company directors. Each member will have to ensure he is given regular and accurate management information in order not to fall foul of these provisions.
On top of this, members of LLPs are to come within the scope of the Company Directors Disqualifications Act. A disqualified company director may not act as a member of an LLP.
The independent study carried out for Companies House last year led the DTI to conclude that in the region of 90,000 companies and partnerships were interested in becoming LLPs, though they were quick to admit that it was only a rough guess.
Ever since the concept of the LLP was launched in 1996, most firms have declined to make any decision, awaiting clarity on matters such as taxation and personal liability. Now there is certainty on those matters, certainly as far as statute law is concerned, it may be that firms will wait to see how developments currently in train might affect their decisions.
While the tax treatment of LLPs has been settled, via statutory provisions and the Inland Revenue’s plans set out in the December 2000 tax bulletin, the SORP on LLP accounting will not be available until later in the year.
The SORP will issue guidance on annuities.
Whatever happens the LLP arrives as an entity fashioned with accountancy uppermost in drafters’ minds. The government no doubt hopes the effort has been worthwhile.
Upheavals in the corporate landscape
The new Companies Act that emerges from the current Company Law Review is likely to contain sharply differing rules between the listed public company and the small private company.
From the outset the review has stressed its intention to produce a Companies Act that reflects the reality of the corporate landscape in the UK. More than 95% of limited companies and small and private and for them much of the current statute is of little or no relevance.
There is an assumption that new private companies will be owner-managed entities that can make binding decisions with the minimum of formalities.
If the review team has its way, all small companies as defined by the EU 4th directive will be exempt from the statutory audit and no private company, whatever its size, will have to appoint a company secretary.
As regards traditional partnerships, the Law Commission is conducting its own review of partnership law. This seems likely to result in a number of significant changes to the partnership format. New partnerships in England and Wales will have a continuing legal personality (as already applies in Scotland) and the partnership will survive the admission and departure of members. Accordingly, there will be a move away from the long-standing idea of the partnership as a network of relationships between the individual partners and towards a concept of the partnership as a legal entity more akin to the corporate body.
Then again, the birth of the European company appears finally to be imminent.
Political agreement on the concept was reached last December, after 30 years in the pending tray, and the commission intends that, via a directly applicable regulation, the European company will be a reality by 2004.
This new type of entity will be, in theory at least, attractive to corporate structures operating in a number of EU countries and for which it might make more sense to operate as single companies than as multi-national groups.
Given these developments, it could be that firms will wait to see whether the new statutes for companies, partnerships and even the European company offer them a more attractive deal than that offered by the LLP Act.
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