Adviser: Tying up the loose ends

Link: Small practice advice

As of this month, a total of 8,300 LLPs have been incorporated in the UK, compared with over 550,000 traditional partnerships.

The relatively few number of firms – professional and otherwise – that decided to exploit the apparent benefits of the corporate structure suggests that the virtues of the partnership format are still important as far as most firms are concerned.

Despite the continuing support for the format, reforms to the legislation that governs partnerships is on the agenda. Given that the legislation dates from 1890, the only surprise must be that the old statute has worked so well for so long.

The reforms will not be dramatic – but they will focus on the ‘problem’ issues, which were addressed in the review of partnership law undertaken by the Law Commissions of England and Scotland between 2000/03.

The main issue is the question of legal personality. English partnerships (unlike Scottish ones) are not legal entities. This has the effect that a partnership only exists as a network of relationships between the individual partners, and the partnership dissolves once the network is breached by the departure of a partner or the arrival of a new one.

Other negative effects of the lack of legal personality are that partnerships may not, technically, enter into contracts, engage in legal proceedings or hold property.

The new legislation will provide that all partnerships, in England and Scotland, are legal entities. They will still, however, be taxed on a transparent basis. Any necessary legislation to ensure this will take similar form to the legislation that ensures the transparent taxation of limited liability partnerships.

The other main problem with current legislation is how the affairs of a partnership are to be dealt with when it has outlived its purpose. A solvent partnership may be wound up by the partners or by a court-appointed receiver.

The reformed law will continue to allow partnerships to make use of either of these options. But to minimise the effects of deadlock and disputes between partners there will be a statutory system for winding up a solvent partnership under court supervision.

There is likely to be no change to the joint and several basis of liability of individual partners. Each partner will retain potentially unlimited liability for liabilities incurred by his or her partners. This is without prejudice to any developments on liability limitation.

With the corresponding reforms being made to the law governing companies and charities, added to the 2000 legislation on the LLP, the UK business environment will have received a through spring clean by the end of this decade.

  • John Davies, head of business law at ACCA.

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