New saviour on the block

All are considering a new business structure that will limit their owners’ liability and, this disparate group all hope, give them the freedom and managerial flexibility to seize new business opportunities.

In the UK the Limited Liability Partnership Act comes into force on 6 April. It has been described, no less, as the most significant new form of business entity to have emerged in the UK for more than 100 years.

Already businesses in other countries are casting an envious eye over the flexibility it offers. And it’s not just Poland or, to a lesser extent, Russia that is going down this route.

The Singaporean government is also being lobbied to mirror the change. It being Singapore, the lobbying is of the discreet variety, of course.

The change itself, however, is largely another corporate import from the US, though it also owes a debt to German business law. On the other side of the pond accounting – and other professional services – firms have been able to adopt LLP status for more than seven years.

In 1991 Texas enacted the first LLP statute. It was the savings and loans crisis that precipitated the move which came largely in response to the liability imposed on partners in companies sued by government agencies in relation to the banking failures of the previous decade.

The Texas statute ‘protected partners from personal liability for claims related to a co-partner’s negligence, error, omission, incompetence, or malfeasance’, according to West’s Encyclopedia of American Law. ‘It also permanently limited the personal liability of a partner for the errors, omissions, incompetence, or negligence of the partnership’s employees or other agents.’

The then Big Six became LLPs in Delaware in 1993, though other states did not enact the legislation until some time later. Legislation in Washington and Oregon authorising LLPs, for example, did not become effective until 1995. By the mid-1990s, more than 21 legislatures had adopted LLP statutes, though regional differences are still apparent today.

‘A few states, Oregon among them, limit LLPs to professionals such as accountants, architects, engineers, doctors, and lawyers,’ says David C. Culpepper, a partner with attorneys Miller Nash LLP in Portland, Oregon.

‘Although in most states LLP partners are protected against personal liability for all obligations of the partnership, a protection that is known as full shield protection, some states provide LLP partners with protection against only tort-related liabilities, not contractual liabilities.’

West’s describes LLPs as essentially a general partnership in form, with one important difference.

‘Unlike a general partnership, in which individual partners are liable for the partnership’s debts and obligations, an LLP provides each of its individual partners with protection against personal liability for certain partnership liabilities,’ it says.

An individual partner’s liability, however, can vary from state to state.

‘Many states provide protection only against tort claims and do not extend protection to a partner’s own negligence or incompetence or to the partner’s involvement in supervising wrongful conduct,’ it states.

‘Other states provide broad protection, including protection against contractual claims brought by the partnership’s creditors. For example, Minnesota enacted an expansive LLP statute in 1994. This piece of legislation provided that a partner in an LLP was not liable to a creditor or for any obligation of the partnership. It further provided, however, that a partner was personally liable to the partnership and co-partners for any breach of duty, and also allowed a creditor or other claimant to pierce the limited liability shield of a partner in the same way a claimant may pierce the corporate veil of a corporation and personally sue an individual member of the corporation.’

States that recognise LLPs require partnerships to register as an LLP with the appropriate state authority and fulfil a number of requirements.

‘Some states require proof that the partnership has obtained adequate liability insurance or has adequate assets to satisfy potential claims,’ according to West’s.

‘All states require a filing fee for registration and also require that an LLP include the words “Registered Limited Liability Partnership” or the abbreviation LLP in its name.’

However this approach of continually developing and refining business structures throws up the risk of alphabet soup.

As well as LLPs in the US there are already LPs (Limited Partnerships) and LLCs (Limited Liability Companies) and Professional Limited Liability partnerships. A partnership that renders specific professional services may form an LLP and register as a PLLP, a structure of particular interest to accountants in the US.

‘It is generally the same as an LLP except that it is an association solely of professionals,’ West’s says. ‘Each state specifies the qualifying professions for a PLLP. This business form is typically available to attorneys, physicians, architects, dentists, engineers and accountants. New York’s limited liability partnership statute restricts eligibility to partnerships that render professional services.’

Signals on take-up of LLPs in the UK so far are mixed. Some legal commentators expect within five to ten years, the majority of the profitable law firms will be LLPs.

However a survey by Companies House last year revealed that most firms are delaying a decision on becoming a limited liability partnership until they see the legislation in its final form.

So far only Ernst & Young has publicly pledged to push ahead. But with the audit expectations gap showing no signs of closing – and the threat of litigation apparently growing all the time – it is only matter of time before more firms consider their adoption.

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