Legalised coupling

It's all change for one of the more familiar business structures of the construction world. The partnership, a common structure for professional consultants, has just received a major overhaul with the introduction of Limited Liability Partnerships. The LLP, a fresh form of business structure introduced by an act of parliament, became effective on 6 April 2003.

As Building reported (19 September, page 11), quantity surveyor EC Harris is considering transferring to LLP status. So just what is an LLP and what distinguishes it from a conventional partnership?

An LLP is a separate legal entity. This means that it can buy and hold assets and trade on its own. But the key point is that such trading occurs with the LLP, not the partners. As a result, the partners are only liable to the extent of their capital investment in the LLP.

(In a conventional partnership, on the other hand, each partner is responsible for debts and liabilities. Personal liability for the actions of another partner in a large partnership – which may have hundreds of partners in different jurisdictions – can be extremely onerous.)

A legal claim against an LLP is, therefore, against a legal body, not the partner. (A legal action against a conventional partnership could involve naming, serving and suing each individual who was a partner at the time.)

In this sense, an LLP is akin to a limited company: a stand-alone entity responsible for its debts and liabilities. An LLP must carry these initials in its name to signify its status.

The quid pro quo for the protection offered as a separate legal entity is that the LLP must file certain accounting information at Companies House. The rationale behind the LLP is that the world at large must be able to assess the assets and creditworthiness of the LLP in order to decide whether to trade with it. Again, this makes an LLP more analogous to a limited company.

(The conventional partnership, in contrast, had two disadvantages for people trading with it: first, it could be difficult to ascertain the strength of its financial covenant; second, it could be hard to ascertain who was a partner at any point in time.)

But an LLP still shares numerous characteristics with a conventional partnership. It is funded in the same way – that is, by capital contributions from partners – and the profit is shared equally between partners unless there is an agreement to the contrary. This reflects the common law position in relation to partnerships generally.

Avoiding double taxation, coupled with the removal of personal liability, is one of the strongest reasons for an LLP

Also, the LLP retains "tax transparency": that is, a partner is only taxed once on the profit of the partnership. A limited company is taxed on its profit as a separate legal entity (corporation tax), and then recipients of a share of the profit (such as by a share dividend) are taxed again. This double taxation has been avoided. Coupled with the removal of personal liability, it is one of the strongest reasons to choose an LLP.

In terms of internal affairs, a register of members kept by Companies House allows any interested party to assess who is or is not a partner.

There is also provision for an agreement on the internal relations between the partners of an LLP and fallback provisions that apply in default of such express provision. However, express provision is likely to be the norm, as the regulations provide for equal profit sharing between partners and the right for all partners to be involved in the management of the business, and limit the ability to exclude a partner from the business. All of these are likely to be subject to amendment in a formal agreement.