Note on the benefits & negatives of a Limited Liability Partnership

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Valentine Hardy
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1 GPC: PRACTICAL GUIDANCE NOTE Nte n the benefits & negatives f a Limited Liability Partnership Sectin Pint Details 1 What is a Limited Liability Partnership ( LLP )? LLP s were created by the Limited Liability Partnerships Act 2000 (LLPA 2000). They represent a vehicle fr tw r mre persns intending t carry n a lawful business with a view t making a prfit. Individuals within an LLP are knwn as members rather than partners. Partnership law des nt generally apply t LLPs. Members f an LLP wuld rdinarily enter int a LLP Agreement (the equivalent t the Partnership Agreement that partners f an rdinary partnership wuld enter int). 2 What are the prs? a) Clearly the biggest benefit is the fact that the members f the LLP have (subject t a few exceptins nted in sectin 3 belw) limited liability. Indeed, an LLP is respnsible fr its liabilities, while each member's liability will, generally, be limited t the amunt that it has agreed t cntribute t the LLP itself. b) Unlike an rdinary partnership, an LLP has its wn legal identity separate frm its members and as a cnsequence, and in its wn right can: enter int cntracts sue r be sued hld prperty, and grant a flating charge r debenture ver partnership prperty c) In many respects linked t the abve pint, if previusly unincrprated practitiners (whether perating as singled handed GPs r as a partnership) were t incrprate as an LLP they culd, subject t any restrictins in the relevant cntracts r regulatry requirements/ prhibitins, assign r transfer their existing cntracts t the LLP itself. d) An LLP has histrically been used as a chice f frm f crprate entity (ver and abve a cmpany limited by shares) fr many given they attract preferential tax treatment as althugh it is regraded as having its wn legal identity in law, fr tax purpses an LLP is nrmally treated as a partnership fr tax purpses. Subject t specific circumstances that wuld alter the general apprach, this is beneficial as with a cmpany limited by shares yu find that i) the cmpany pays crprate tax n prfits and then ii) the sharehlders pay tax when extracting mney frm the cmpany (dne via dividends). An LLP is nt taxed n its prfits and instead the members are taxed n their share f the prfits that it (the LLP) generates. 2016

2 3 What are the cns? a) The PMS and GMS Regulatins d nt recgnise LLPs as an entity capable f hlding GMS r PMS cntracts. Changes in legislatin will therefre be required befre they becme a viable ptin. b) It is likely that any GP practice that incrprates as an LLP will face ptential uncertainty as t whether cmmissiners Culd legally transfer their existing cre cntract int the LLP. As a starting pint, and assuming LLPs were recgnised as a legal entity capable f hlding a cre cntract, there is currently n autmatic right t transfer r assign a cre cntract between legal entities within the GMS r PMS Regulatins. With this being the case there are really nly tw alternate ptins available:- Seeking a cntract variatin (variatins being allwed under the GMS and PMS Regulatins) t change the named party frm the individuals t the LLP; r Bringing the riginal cre cntract t an end and having a new ne issued t the LLP. There is sme dubt, and certainly sme incnsistency amngst cmmissiners, as t whether a change in the cntracting party can legitimately be achieved by way f a cntract variatin. As a cnsequence, and unless the GMS and PMS Regulatins are amended t allw cre cntracts t be assigned r transferred t an LLP frm individuals r a partnership, it is highly likely that the nly way in which practitiners culd mve their cre cntract int an LLP is t have new cntract put in place. Culd avid sme frm f prcurement prcedure laid ut in the Public Cntracts Regulatins 2015 ( the PCR ). The PCR effectively places cntracting authrities under an bligatin t advertise and pursue sme frm f prcurement prcess where they are awarding cntracts. As a cnsequence, if cmmissiners were t cancel and reissue cre cntracts then they wuld have n alternative but t fllw the advertising and prcurement requirements in the PCR. But what abut if a cntract was transferred r varied? This is a bit less unclear and a cmplete and full pinin n this issue alne will be needed if GPC decide t push ahead with the prcess f lbbying fr change in relatin t LLPs. Regulatin 72 f the PCR specifically states that public cntracts may be mdified withut a new prcurement prcedure being fllwed in six specified circumstances. One such circumstance is where the cntractr is replaced as a cnsequence f either i) an unequivcal review clause r ptin cntained in the cntract, r ii) a cmplete r partial successin int the psitin f the initial cntractr where the new peratr fulfills the criteria fr 2

3 qualitative selectin initially established at the time the cntract was awarded. On the face f it this wuld enable a successr bdy t take ver a cre cntract but it is certainly cnceivable that this culd be challenged n the grunds that LLPs were nt, at the time the cntract was riginally issued t the cntractrs, identified as a bdy capable f hlding the same. c) Psitive actin needs t be taken t establish an LLP. This differs frm rdinary partnerships that are deemed t be established autmatically where tw r mre peple cme tgether t run a business with a view t making a prfit. The psitive actins invlve the submissin f frms at Cmpanies Huse (knwn as Frm LL IN01). d) There are nging disclsure and filing requirements that must be satisfied. These include: Frmally ntifying Cmpanies Huse f a change f member; Frmally ntifying Cmpanies Huse f a change in the accunting reference date; Submitting an annual return (identifying the members, registered ffice address and where the recrds f the LLP are kept) A requirement that all websites and statinery refer t the LLP, its registered LLP number (which will be issued by Cmpanies Huse when incrprated), registered address etc. e) The limited liability prtectin may be lifted where members have: given persnal guarantees, r been fund t be: negligent, r guilty f wrngful r fraudulent trading (effectively trading despite being in an inslvent psitin). f) Members f an LLP wuld need t have an LLP Agreement. If they fail t ds they will be gverned by the default prvisin as identified in the LLPA 2000 (i.e. the principal legislatin). This wuld be an unsatisfactry psitin fr GPs t find themselves in. T name sme f the issues that the default psitin creates:- All members share equally in the capital and prfits; N majrity f members can expel anther member; There are n effective limits n what a member can cmmit the LLP t (e.g. entering int cntracts ver a set amunt) It desn t cater fr GP specific prvisins (including sessinal cmmitments f the members, the need t remain n the perfrmers list, suspensin etc.) Other cnsideratins Transferring f cntracts. Leaving aside the pssible issues discussed in sectin 3 (b) abve in cnnectin with hw cmmissiners may treat cre cntracts that are transferred it is wrth cnsidering what a practice may face if it were t seek t transfer its staff cntracts and any premises lease agreements int an LLP. 3

4 Staff. In the event that an existing practice were t incrprate as an LLP the partners / practitiner wuld need t (r at the very least wuld be deemed t) transfer the business they perated as a ging cncern t the LLP. As part f this the partners / practitiner will need t fllw the requirements under the Transfer f Undertakings (Prtectin f Emplyment) Regulatins 2006 (TUPE). This requires the staff t be cnsulted and infrmed n the changes that are taking place, the date they will take place (r prpsed date) and the legal, scial and ecnmic implicatins f the transfer f the business t the LLP. This shuld just represent an administrative task but nevertheless it is a task that must be fllwed. Leases. Mst landlrds will be exceptinally cautius f accepting an LLP as a tenant (given its limited liability status) withut persnal guarantees being given frm the individual members. This is smething that the GPs will need t negtiate. Such negtiatins tend t be easier where a new lease is being entered int. They d, hwever, prve mre difficult where GPs are seeking t assign an existing lease that is in their persnal names int a newly frmed LLP. That said, the GPs can ffer sweeteners including a rent depsit r a time limited guarantee. Cncluding cmments: As a legal entity, the use f an LLP culd well help mitigate last man/ wman standing issues. As mentined abve, LLPs have their wn legal identity which are capable, in their wn right, f entering int and/r hlding cntracts. With this being the case GPs incrprated in this way culd lk t ensure that all i) staff cntracts, ii) cmmercial cntracts (such as Peninsula, equipment hire r IT systems) and ii) premises agreements (leases) vest with the LLP. Having regard t the abve, and assuming nne f the circumstances in sectin 3 (e) apply, if the practice became unviable and had t clse the subsisting liabilities held by the LLP wuld rest with the LLP itself. If the LLPs assets were insufficient t meet these liabilities then an individual member wuld nt pick up the shrtfall. Their liability is limited t the sums they have cntributed t the LLP itself. Ntwithstanding the abve it is imprtant t cnsider the fllwing:- i) GPs are already entitled t establish crprate entities (in the frm f cmpanies limited by shares). These entities are similarly entitled t enter int and hld cntracts. They als have limited liability status. The expsure f sharehlders t liability (n the basis that the nminal value f the shares in the cmpany are all fully paid up) is limited t their share capital. It is, hwever, imprtant t nte that in many industries where partnerships were the traditinal mdel f wnership (such as the legal prfessin), LLPs have undubtedly prven the chice incrprated vehicle t use given their tax treatment and the fact that they prve less f a divergence frm the traditinal partnership mdel. ii) iii) There wuld need t be a change in the PMS and GMS Regs t allw these cntracts t be held by LLPs. There is a risk that cmmissiners wuld have t carry ut a prcurement exercise t facilitate the change in the cntracting party t an LLP. 4

5 Disclaimer: This membership guidance nte is fr infrmatin, gives general r limited guidance nly and shuld nt be relied upn slely r treated as a cmplete and authritative statement in respect f its subject matter. Members are advised t seek legal advice if they are cnsidering the establishment f an LLP as a vehicle thrugh which they run their practice. END. 5

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