All You Kneed To Know About A Limited Liability Partnership.

Thinking of transforming your small business into a limited liability partnership ?
Not able to differentiate between different partnerships and a limited company ?

Your accounting guide has the answers.

By the end of this page, you would have read about the most important characteristics of a LLP. We expect you to make a purely informed decision about the future of your small business, depending on how you feel the benefits of change outweigh the costs.

Definition

A Limited liability partnership resembles a limited company in two key respects:

It is a body corporate with separate legal personality, and the liability of its 'members' is limited. In so far as its status and external responsibilities are concerned, the LLP is very similar to the limited company.

In terms of its internal affairs, however, it is more similar to the traditional partnership. A Limited liability partnership can be formed by at least two natural or legal persons and it is advisable to have a suitable members' agreement drawn up.

Advantages

• It is a body corporate with its own legal identity and capacity
• Members can limit their personal liability for business debts (although personal liability can arise in circumstances similar to those applicable to limited companies).
• It is taxed as a partnership — tax is charged on all the profits, whether or not they are distributed to members.
• In a Limited liability partnership there is a redistribution of risks from partners who have no responsibility to the LLP, from the point of view of third party claims.

  Under a LLP, you may take on remunerative assignments involving risks that would be too high for a general partnership, given the personal exposure of individual partners.

• If your small business offers professional services, your liability and other partners to a third party over wrongful acts or omissions is not quite so clear. The third party will need to prove in the court of law that the concerned partner has assumed personal responsibility for advice and that the party relied on the aforesaid responsibility.

  None of these will need to be proved in the court of law by the third party in case of generalpartnership, where a partner is always personally liable.

  The limited partners amount of liability and share of profits can be freely agreed between the partners in the partnership agreement.

• The ability to attract outside investment to fund practice development rather than relyingon the partners personally or the bank. This means your firm will be able to fast track its developmentand keep pace with client demands and compete effectively.
• Small business service providers often face serious succession problems, one of which is their lack of ability to attract high caliber individuals into the partnership.

  Becoming a Limited liability partnership will make your Firm considerably more attractive to potential partners or incoming partners to your firm who are not responsible for practice debts or financial liabilities that were sustained prior to their arrival.

• It has the organisational flexibility of a partnership


• The members' agreement is confidential.

Disadvantages

• A limited liability partnership must be registered at the Registry of Companies.


• It must prepared and file annual accounts and tax returns like for a company.


• There are other filing requirements with strict time limits for compliance.


• Withdrawals may be clawed back if the Limited liability partnership is declared insolvent within the next two years.


• Each member is subject to income tax on his/her own income from the firm as if they were self-employed.


• Compliance costs and some red tape will be required to Convert a general partnership to a Limited liability partnership or start up relating to formation of the firm depending on size and complexity.


• You and your partners might be asked for personal guarantees by some lenders. This could affect the future of your partnerships, when faced by financial difficulties.


• Your LLP may need proper professional Indemnity Insurance Cover.
  Indeed, many contracts might require proof that your Limited liability partnership has a specified minimum level of aforesaid insurance for a fixed period.
  Meeting the cost of premium, may be difficult in the cases when your LLP is experiencingdownturn in practice or due to retirement of partners

Working relationships

If your business is going to have more than one partners, then you must collectively determine what your working relationship will be. It is very vital for you to discuss the main issues and write down a members agreement.

In the case of a limited liability partnership, these should include:

• The names of the partners and the name of the business, and what it does.


• The date the partnership starts and how long it will last (if not permanently).


• The capital each partner is to contribute.


• How the profits (and losses) are to be shared and how much money each partner can draw from the business.


• How the business is to be run.
  For example, how much time each partner is to put into the business and a limit on the value of cheques which require only one signature.
• Details of holiday entitlements.


• What to do if partners die, become ill or want to retire or reduce their involvement.


• What the arrangements will be for introducing new partners.

Registration

Even if you are not focusing on e-commerce straight away, it is important to register the web address you want at the earliest for your limited liability partnership. This is because hundreds of websites a registered daily, and your preferred name might be taken by the time you decide to.

Consider registering different versions of the name (eg with and without hyphens) and appropriate suffixes (usually .co.uk, .org and .com)

When choosing a company name, be aware of your registrar of Companies policy on ‘same’ and ‘too like’ names, especially if you want to include ‘.co’, ‘.com’ ‘@’, and so on. It’s much better to avoid potential problems from the start rather than be forced into making a costly change later on.

Specific features to Note

A Limited liability partnership is a body corporate which you form by incorporating it under the related legislation, and has its own separate and distinct legal existence, separate from you the partners. It is the LLP which enters into legal agreements, not you the individual partners and generally has thefollowing features:

• A LLP will permit you to be shielded from joint liability created by other partner’s decisionor misconduct. Thus every partner of a the LLP is an agent of the small business but not of other partners.


• A LLP has a perpetual succession. In other word partners come and go


• Any change in the partners of a limited liability partnership shall not affectthe existence, rights or liabilities of the LLP.


• A LLP has at least two partners. There is no limitation on the maximum number of partners.


• Another LLP and or Company can also be partners in your firm.

• A Limited liability partnership is an extremely flexible business vehicle . LLP partners, unlike a company, are both theshareholders and directors. The partners are free to organise themselves internally
  e.g. how you will share profits, who will be responsible for management and how decisions are to be made.
• Every LLP needs to have a manager, who is responsible for all the acts as required to be done bythe LLP and personally be liable to all penalties imposed on the LLP for any contravention of therelated legislation.
• A LLP must have either the words “limited liability Partnership” or the acronym “LLP” as the lastwords of its name.
• The mutual rights and duties of the partners , and the mutual rights and duties of the firm and its partners, are governed by the agreement between the partners, or between the LLP and its otherpartners. You need to file the agreement with the Registrar of Companies to the extent stated in therelated legislation.
• Every LLP must lodge with the Registrar of Companies an annual declaration of solvency.


• A firm /company may apply to convert to a LLP, if LLP to which it converts comprises of all the partners of the firm/ shareholders of the company respectively.


• A LLP has to maintain proper books of account on an accrual basis, to give a true and fair view of the firms performance .


• The winding up of LLP may be either by a tribunal or voluntarily by the members.


• The administration of LLPs, like a company, is through a line Ministry or Registrar of Companies.LLPs are already in existence and are popular in countries like USA, UK, Germany, Canada , Australia and Singapore and some African Countries.

Accounting

At this level of business, stakeholder expectations on your firm will be higher as your small business grows. As a result you need to plan for a good accounting system.

Accounts normally fall into two sections:

• year end accounts - these are produced annually for the 12 months up to the business year end, say 31 December each year. The primary function is to provide figures for your tax returns and to have details of your annual accounts filed at the registrar of companies. It is fair to say that the vast majority of businesses use an accountant to prepare the year end figures.

  This is because this process is a highly technical area and although you can assist in keeping the records accurately and up to date, a qualified accountant can ensure that the accounts are finalized properly and conform with all local and international legislation.

• Monthly or quarterly accounts - sometimes known as management accounts, are produced much more frequently for specific purposes. For instance the performance of the business needs to be constantly monitored and outside users such as banks and other lenders may request this information.

  These accounts do not generally have to be produced by law but it is important that they are as accurate as possible so that the true position of your Limited liability partnership can be assessed. Again the involvement of a qualified accountant will help you in this process.

In our professional view, the advantages of combining the characteristics of both company and partnership, potential acceptance in the international business arena and the prospects of growing your small business against world-class competitors merits a serious consideration in favor of a limited liability Partnership.

Return from limited liability partnership to starting a small business.