Limited Liability Partnerships: Time for Change
Author:
Aidan Lambe
A key priority in ensuring Ireland remains a good place in which to do business and continues to compete favourably with other jurisdictions in attracting international investment is to make sure we keep up with the pace of legislative changes in other parts of the world.
For some time now, the Institute of Chartered Accountants in Ireland has been arguing for the establishment of a Limited Liability Partnership legal framework.
Introduction
There is no doubt that the traditional form of partnership, governed by the Partnership Act, 1890, has been under considerable strain for quite some time. This has been largely due to the growth of sizeable partnerships over the years - particularly among professional services firms in the accounting and legal professions.
The 1890 Act sets out the rules relating to the liability of partners to those persons dealing with them. Partners' personal assets can be put at risk by the actions of partners over whom they have no control or of whom they have little knowledge.
Background
Globally, Limited Liability Partnerships (LLPs) have been operating in the US for 10 years or so. LLP legislation also exists in Canada and Australia. Since 2001, businesses in England and Wales have been able to establish as LLPs. More recently, since 1 November 2004, businesses in Northern Ireland may also be structured as LLPs.
UK Experience
It is fair to say that the emergence of LLPs in the UK had its origins in the early 1990s when a large number of professional firms were faced with an ever increasing possibility of bankruptcy due to a combination of large claims against them and the fact that, as partnerships, the claims were so large as to bankrupt personally the partners who owned them.
This risk was not confined to large accountancy firms. It also affected construction firms, architects, actuarial firms and other professional groups.
Another driver towards LLPs in the UK was the imminent arrival of an LLP regime in Jersey and the threatened move to that jurisdiction from the UK by large professional partnerships.
A primary objective of the advocates of LLP legislation was to underpin the future of a successful professional sector in the UK. They argued that the consequences of failure to address the prospects of mega-lawsuits against professional partnerships would include:
- Inability to attract and retain the brightest and most able talent in certain professions because of partners' fear of putting at risk personal assets arising from catastrophic losses outside their control;
- Prohibitively expensive professional indemnity insurance, or simply unavailable professional indemnity insurance for higher risk work;
- Refusal on the part of professional firms to take on high-risk assignments, often involving business start-ups.
Since the introduction of the legislation in England and Wales, more than 8,000 LLPs have been established. No figures are available as yet for Northern Ireland.
So what exactly is a Limited Liability Partnership?
In the UK, a Limited Liability Partnership is a form of corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organising their internal structure and enjoying the same tax status as a traditional partnership. The LLP is a separate legal entity and while the LLP, as a separate legal person, will itself be liable for the full extent of its assets, the liability of its members will be limited.
An LLP can own property, employ people and enter into contracts with third parties. Debts it incurs are the debts of the LLP. It has unlimited capacity meaning that third parties with whom it deals can be confident that there are no restrictions on its activities.
An LLP has members but not shareholders or directors. There is no share capital and there are no capital maintenance requirements as with companies.
As mentioned above, in the UK context, members of an LLP have limited liability. The LLP is liable for all its debts to the full extent of its assets.
An attractive feature of the LLP model is that there is complete flexibility in terms of internal structure it can adopt. There are no requirements governing general meetings or decision making. Normal practice suggests, however, that such matters are the subject of formal internal arrangements between members.
The privilege of limited liability, however, comes at a price. The UK model affords certain protection for those dealing with LLPs. Specific measures include:
- the maintenance of accounting records;
- the preparation and public filing of audited accounts; and
- the submission of an annual return.
Taxation issues
In the UK, an LLP is taxed as a partnership. This ensures that the commercial decision between using an LLP or a partnership should be a tax neutral one. The taxation clauses in the UK legislation are expressed in broad terms so that existing taxation rules for partners and partnerships and partners simply apply to LLPs and their members as if they were partnerships and partners respectively.
Of course, the LLP vehicle does not alleviate the concern of the auditing profession over the issue of auditor liability where, under current company law, auditors can be held liable for the defaults of others. Urgent action is also needed on this front.
In addition, for the LLP vehicle to be attractive to auditors, a change in company law is required permitting statutory audits to be carried out by incorporated entities.
The creation of an LLP legal framework has long been a policy objective of the Institute of Chartered Accountants in Ireland. Given the increasing complexities and burdens imposed by company law, particularly on SMEs, it is appropriate to consider alternative models by which business may be conducted.
A working party under the auspices of CCAB-I and chaired by Brendan Murtagh, FCCA has recently been established to prepare a formal submission to Government on the issue.
Given the similarities between the legal frameworks in the UK and Ireland, it should not be difficult for Government to bring forward its own proposals on this area.