LLPs – What you should know

Limited Liability Partnerships (LLPs) are the result of a campaign by professional firms, particularly accountants, faced by an increasing number of very large professional negligence claims. Partners in traditional partnerships have unlimited liability for the debts and other obligations of their firm. Although they invariably insure against claims of professional negligence, some claims threatened to exceed the amount of insurance that was obtainable or affordable. The option of conducting the business as a limited liability company is available but would entail the loss of the more attractive tax regime available to partnerships.

LLPs are the result of a campaign by professional firms, particularly accountants, faced by an increasing number of very large professional negligence claims. Partners in traditional partnerships have unlimited liability for the debts and other obligations of their firm. Although they invariably insure against claims of professional negligence, some claims threatened to exceed the amount of insurance that was obtainable or affordable. The option of conducting the business as a limited liability company is available but would entail the loss of the more attractive tax regime available to partnerships.

A new business vehicle was sought which would limit partners’ liabilities in a similar way to company shareholders. In other words, they should stand to lose the capital they have put into the business but their other personal assets should not be put at risk. Also, the partnership tax regime should be preserved.

LLPs largely meet these objectives, and their attractions are not limited to professional firms. LLP status may not be the best route for all partnerships but all should give it serious consideration. Two caveats should be noted in particular.

First, the limitation of liability is not quite so extensive as that provided to company shareholders. In some circumstances an individual LLP member may have unlimited liability for the consequences of his own errors, so insurance is no less important than before. Also, members in an insolvent LLP may be compelled to return money which they have withdrawn in the previous two years. This obligation (which is being called "clawback") does not apply to company shareholders.

Second, there is a price to be paid for limited liability. The financial affairs of traditional partnerships are private to all but the tax man but LLPs must file annual audited accounts with the registrar of companies and, just like companies, these accounts will be available for public inspection. For some, this may be too high a price to pay.