I am often asked by clients what the advantages are to becoming a “Limited Liability Partnership” rather than remaining in a normal partnership.
As a straightforward partnership, of say two partners, each partner is liable in full for all the debts and liabilities of the partnership. If things go badly wrong and one partner just disappears, the remaining partner is left to carry the can in full for all the liabilities of the partnership. Although the remaining partner is generally entitled to a contribution from the other partner, this is not much help if the other partner has disappeared.
A Limited Liability Partnership (“LLP”) is like a company and is a separate legal entity. With a few exceptions, in an LLP, the individual partners are not personally liable for the debts and liabilities of the business. Instead, it is the LLP which is responsible and if the LLP is not able to satisfy its debts and liabilities from its own assets, it can be put it into insolvency. The big advantage is that, generally, each partner’s own personal assets, such as their house, are not at risk as they do not form part of the assets of the LLP.
Whilst there are some relatively minimal additional costs associated with being an LLP, from a tax point of view, each partner is taxed on pretty well the same basis as is the current position. However by becoming an LLP, individual partners may be able to sleep a little better at night.
By David Gordon
