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company being unable to meet its liabilities.
The company can limit its own liability and the risk of liability in the same
way as a partnership, but the owners™ and directors™ personal liability for the
debts of the company are already limited. Shareholders should take care who
they appoint as directors, and the directors should police each other.


The Limited Liability Partnerships Act
As a result of recent UK legislation there is a further alternative: this is known
as the limited liability partnership. It is important that small business represen-
tatives and their advisors should be aware of the alternatives in practice having
regard to today™s climate of proper transparency and corporate governance.
The Limited Liability Partnerships Act 2000, which became law on 6 April
2001, created the business entity called the limited liability partnership or LLP.
The Act is much more accessible than many other legislative instruments. It is
unusually short, consisting of 19 sections and a schedule. These cover the core
characteristics of the LLP, including:
The requirements for incorporation;
Membership issues (including, becoming and ceasing to be a member);
The LLP agreement;
Taxation;
Regulation and definitions;
Commencement; and
Application.
The implementing regulations are the Limited Liability Partnership Regulations
2001.

Main characteristics of the LLP
The LLP is a body corporate with separate legal personality. It has unlimited
capacity. It is the LLP which carries on the business and which is the subject of
the duties and liabilities of the business. On the winding-up or dissolution of
the LLP the liability of its members to contribute will be limited to whatever
has been agreed in this respect. Every member of an LLP stands as an agent of
the LLP, subject to some exceptions. The individual members of the LLP are
protected by the LLP from personal liability for both their own acts and those
of their fellow members.
In order to incorporate an LLP there must be two or more persons associ-
ated for carrying on a lawful business with a view to profit, and they must sub-
scribe their names to an incorporation document. The two persons may be
Chapter 6 “ Risk and corporate organisational areas: an overview 113



natural persons, bodies incorporate, trustees or partnerships and they may
reside anywhere in the world. In order to incorporate there must be at least two
designated members or provision that every member is to be a designated mem-
ber (see further below). The incorporation document is delivered or submitted
in paper form to the Registrar of Companies. The approved form of incorpor-
ation document is Form LLP2, which sets out a clear format for disclosing the
information prescribed by the Limited Liability Partnerships Act at the time of
incorporation. The LLP2 must provide:
The name of the LLP which must end with ˜Limited Liability Partnership™,
˜llp™ or ˜LLP™;
The legal domicile of the LLP, such as England and Wales or Scotland;
The address of the registered office of the LLP;
The name and address of each member of the LLP; and
The details of the designated members.
A well-drafted written LLP private agreement should also be formulated which,
unlike the memorandum and articles of a company, is not a public document
(see further below).


Designated members
The designated members have the duty or responsibility to ensure that the LLP
should meet its disclosure obligations under the Limited Liability Partnership
Act. As it is a vehicle with limited liability the LLP is also subject to the compli-
ance regime or requirements of the Companies Act 1985. Therefore, like a pri-
vate limited company, the LLP must file an annual return and statutory accounts
with the Registrar of Companies at Companies House. In addition an LLP is simi-
larly subject to the provisions of the Insolvency Act and the Company Directors
Disqualification Act. Accordingly members of an LLP are subject to potential
personal liability under the provisions of the Insolvency Act relating to ˜wrong-
ful trading™. They are also subject to disqualification under the Company
Directors Disqualification Act in the same way as company directors.


Comparison with UK private limited company
The LLP differs from the UK private limited company in three important ways:
An LLP can establish the decision making and profit distribution arrange-
ments more or less as the members wish. Whereas certain other provisions of
the Companies Act 1985 apply, the LLP is not subject to the strict rules con-
cerning share capital, the management of companies, as well as the meetings
and resolutions that govern companies;
Unlike a company there is no distinction built into the structure of an LLP
between the roles of proprietors and management. In effect this means that the
decision making and profit distribution arrangements are a matter for private
agreement. These should be set out in a written LLP agreement that is a
Part A “ Overview of Risk Management
114



private agreement and not a matter of public record. It is important to under-
stand that in the absence of a properly drafted agreement the default provi-
sions that are contained in the LLP Regulations 2001 apply and lead to
unforeseen and unwelcome repercussions; and
Unlike a company, which is a separate fiscal entity, a UK LLP is what has
become known as a fiscal transparency.

Fiscal transparency
Essentially Section 10 of the LLP Act 2000 provides that a trade, profession or
business carried on by an LLP shall be treated as though carried on in partner-
ship by its members. This means that the members of an LLP are taxed under
the self-assessment rules as if they were partners in a partnership. Therefore,
like a partnership under UK law, the LLP is fiscally transparent. There is no tax-
ation at the entity level. Profits and losses flow through the members them-
selves, subject to the important caveat that such transparency is lost if the LLP
goes into insolvent liquidation or is wound up for a tax avoidance reason, that
is avoidance of UK taxation. This fiscal transparency is very important in the
context of tax planning. It means that, in view of the fact that the LLP is not
required by law to have UK resident members (whether individuals or com-
panies) the LLP has significant application for cross-border trading arrangements.
It should be noted that in the case of a UK LLP with non-UK resident mem-
bers UK taxation is only chargeable on profits derived by such a member if
either the profits are derived from a trade subsisting in the UK or if the profits
otherwise have a UK source. There is no single test to establish whether or not
a trade is exercised in the UK and this aspect can be examined in more detail in
another article. Moreover the examples of UK source income can similarly be
considered in a separate article. For the purpose of this discussion it is, how-
ever, important to bear in mind the principle of fiscal transparency in the con-
text of risk management and sustainability.


Investment activities
One question that is pertinent is whether a UK LLP can function as an invest-
ment vehicle. This could happen, for instance, in the case of shares held in a
non-UK company with a view to receiving dividend income or realising capital
gains. The tax transparent nature of the LLP is based upon the LLP carrying on
business with a view to profit. The issue is whether the conduct of a pure
investment holding function is the carrying on of a business. This can also be
considered on another occasion, along with consideration of the LLP as a
potential tax planning vehicle.


Comparison with limited partnerships
The limited partnership is a long established alternative structure as compared
with the LLP. It was created by the Limited Partnership Act 1907. Like an LLP
Chapter 6 “ Risk and corporate organisational areas: an overview 115



a limited partnership is fiscally transparent. However, the characteristics can
vary to a small or large degree depending on a particular case and the needs of
the founders. As with LLPs the limited partnership can be subject to English or
Scottish law. It should be noted that under English law the limited partnership
has no separate legal personality whereas under Scottish law it does.
Important distinctions arise relating to the principal place of business and
the filing of accounts. However, to discuss these in further detail is beyond the
scope of this chapter, but the fact that such distinctions exist should be noted.
In an age of increasing disclosure requirements the transparency of the LLP
may prove to be a useful advantage.
There is some evident value in understanding the nature of the LLP as an
alternative to other more traditional vehicles. Its existence may provide a commer-
cial and tax efficient opportunity for small business depending upon the object-
ives of the members. Having regard to today™s highly sensitive regulatory and
business requirements relating to corporate governance the LLP may enable a
viable choice for small business representatives to consider subject to, of course,
any professional advice taken and their individual needs and circumstances.

The partnership (firm)
It is still more usual to find that when two or more traders decide to combine
operations and share assets they may form a partnership which lawyers, but not
everyone else, know as a firm. Alternatively, they may (for example) like doctors
in a group practice or barristers in chambers work together only in the sense of
sharing accommodation and overheads while continuing to trade or practise as
individuals. In the latter case, they remain sole traders. A partnership is rather
like a marriage. It can be easily formed. It can quickly and easily be dissolved,
but the consequences of dissolution can be far-reaching. The distinguishing fea-
ture of a partnership is that each partner, no matter what his or her personal
share of the partnership assets and business is personally liable for the whole
debts of the partnership. Again, that means personal assets, not just partnership
or business assets. This means that if Mark and Jane set up a partnership
together and Mark runs off with a client™s money, or gives bad advice as a result
of which the client suffers recoverable loss, the disgruntled client may look to
Jane for the whole of his loss. This applies even when the client had never pre-
viously had any business dealings with Jane within the partnership and when it
is clear that the cause of his misfortune is Mark. If Jane has to foot the partner-
ship bill she will have recourse against her partner (according to how the part-
nership is set up) but if he has disappeared or is penniless, that will be of little
comfort. Perhaps then the first rule of risk management in a partnership is, like
a contemplated marriage, to choose one™s partner (or partners) carefully.


Key features of a partnership
A partnership can be created at will. While it is advisable to have a partnership
deed spelling out the structure of the partnership and, in particular, the
Part A “ Overview of Risk Management
116



personal liabilities of the partners towards each other in the event of partner-
ship insolvency, the partnership can come into being without any formality
whatsoever. Each partner places his personal assets at risk in entering into a
partnership. In these circumstances one wonders why this form of business
entity should ever be adopted. It has the advantage of great simplicity and that
is perhaps its primary attraction. However, some professions (for example,
solicitors) have for many years been obliged to conduct their business either as
sole traders or partners. The theory behind not allowing some professions to
limit liability by incorporation is that it keeps the practitioners ˜on their toes™
and by preventing ˜outsiders™ from participating in the profits, keeps the
practice in the hands of the professionals. With compulsory insurance to com-
pensate for losses, this obstacle to incorporation has increasingly been regarded
as outmoded and now one often sees professional partnerships that are in
fact LLPs.




Partnerships can be very useful for occasional as opposed to full-time
business or (for example) when friends or members of a family pool their
resources to purchase a property to let for investment purposes.




Generally speaking, professional rules, regulations and restrictions aside,
most or many partnerships could probably operate satisfactorily as limited lia-
bility companies. Some traders, however, prefer to remain in partnership rather
than become directors of their own limited company and then be treated by the
Inland Revenue as employees and taxed accordingly. Another attraction may be
that partnerships are not (unlike limited companies) required to file (for public
record) partnership accounts. A self-employed partner in a business may con-
clude that the personal tax advantages he may enjoy as such outweigh the
peace of mind of being a director and/or shareholder of a limited liability com-
pany. Perhaps we will see a more rapid development of the limited liability part-
nership that lies somewhere between a partnership and a limited liability
company.
Personal liability, or the risk of it, can be reduced in the same ways as the
sole trader, added to which list must be the caution to choose one™s partners
carefully. Partners should also recognise the need to diplomatically ˜police™
each other™s activities.
What often happens is that the sole trader progresses to a partnership. The
partners then conclude that it is cheaper and therefore preferable to run the
business as a limited liability company than to pay high liability insurance pre-
miums. They may also prefer not to lie awake at night worrying about keeping
the home safe from the business or worrying about having placed the home in
the sole ownership of the spouse with that in mind.
Chapter 6 “ Risk and corporate organisational areas: an overview 117



The sole trader (the one man band)
This is the simplest form of business ˜organisation™. With a few exceptions, the
trader will be free to set up and run his business without prior registration,
licence or formality. Like everyone else, the trader will have to keep business
records so that he may properly account to the Inland Revenue. Depending on
annual turnover, the trader may have to register for VAT purposes (at risk of
being personally liable for uncollected VAT if he fails to do so). For some busi-
nesses (for example, where public health may be involved), it may be necessary
to first obtain formal registration or a permit to trade. In the case of most profes-
sions, it will be necessary to comply with professional rules and restrictions.
For the majority of businesses, however, no such obstacles or restrictions apply.
The business may be carried on in the name of the trader or the trader may
use a ˜business name™. If the business name is not offensive and does not sug-
gest that the business is (for example) a limited company, or connected with
government, the trader may generally adopt whatever name he pleases without
the need to obtain permission or register it.



Registration of business names
The now repealed Registration of Business Names Act 1916 required any
individual, partnership or company using a business name other than
their own name to register it, declaring details of its proprietors. The real
but undeclared purpose of that legislation was apparently to flush out the
German shopkeepers and businessmen in Britain who were hiding behind
non-German business names at a time of intense nationalistic feeling.
Fortunately the world has changed.

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