House of Lords
Publications on the internet
Other Bills before Parliament
Arrangement of Clauses (Contents)
|Limited Liability Partnerships Bill [H.L.]|
These notes refer to the Limited Liability Partnerships Bill [H.L.]
Limited Liability Partnerships Bill [H.L.]
1. These explanatory notes relate to the Limited Liability Partnerships Bill [H.L.] as introduced in the House of Lords on 23rd November 1999. They have been prepared by the Department of Trade and Industry in order to assist the reader of the Bill and help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. The note comprises a summary of the Bill, an explanation of its background and a clause by clause commentary.
2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
3. The Bill's main purpose is to create a new form of legal entity known as a limited liability partnership ("LLP"). The essential feature of an LLP is that it combines the organisational flexibility and tax status of a partnership with limited liability for its members. This limited liability is possible because an LLP is a legal person separate from its members.
4. The Bill provides powers to apply the provisions of company law and insolvency law, with appropriate modifications, to LLPs. These powers will be used to put safeguards in place for those dealing with LLPs. It is intended that the safeguards will include provision for the public disclosure of information about LLPs particularly their finance and provisions for what happens when an LLP becomes insolvent.
5. The Bill creates a new form of legal entity, the limited liability partnership, which will be a body corporate and exist as a legal person separate from its members. In general, the Bill
extends to England, Wales and Scotland. Clauses 10 - 12 (taxation) also extend to Northern Ireland
6. In Great Britain businesses operate in the main as limited companies, companies limited by guarantee, sole traders or partnerships. Each of these is subject to different regulatory and tax regimes reflecting their organisation and ownership.
7. The only option for many professions, in the past, was to operate as partnerships, as either statute or the rules of their professional body denied them the ability to incorporate. For example, accountancy firms have only been able to incorporate since 1989. The fact that professional bodies were required to operate as partnerships meant that they were subject to the particular rules relating to the liability of partners.
8. The Partnership Act 1890 sets out special rules relating to the liability of partners to persons dealing with them. First, every partner is liable jointly, and in Scotland severally also, with his other partners for all the debts and obligations of the partnership incurred during his membership. Second, every partner is jointly and severally liable for any loss or damage arising from the wrongful acts or omissions of any of his partners (as well as his own) which were done in the ordinary course of the partnership's business or with the authority of the partners. When the members are liable jointly and severally for any loss or damage this has the effect that an injured person may sue one or more of the members separately or all of them together at his option.
9. These arrangements were generally appropriate when all partnerships were small and the partners were of the same profession working closely one with another. However, unlimited liability for partners has become an increasing cause for concern in the light of:
(a) a general increase in the incidence of litigation for professional negligence and in the size of claims;
(b) the growth in the size of partnerships; since in a very large partnership, not all the partners will be personally known to one other;
(c) the increase in specialisation among partners and the coming together of different professions within a partnership;
(d) the risk to a partner's personal assets when a claim exceeds the sum of the assets and insurance cover of the partnership.
Although these concerns arise most acutely in very large professional partnerships they are relevant to partnerships generally.
10. The limited liability partnership goes some way towards addressing these concerns. Its members benefit from limited liability because the LLP is a separate legal person. The LLP and not its members will be liable to third parties. However, a negligent member's personal assets will still be at risk. By way of example, under the general law, a professional person owes a duty of care to his client. Negligent advice given in breach of that duty by a member of an LLP will, in general, give rise to a potential liability on the part of that member as well as the LLP.
11. More particularly, the idea that there should be the opportunity in Great Britain to organise as an LLP emerged out of a review of the law of joint and several liability. In 1996 the DTI published a feasibility investigation of joint and several liability carried out by the Common Law Team of the Law Commission (HMSO ISBN 0 11 515 452 3). The investigation focused particularly, but not exclusively, on the joint and several liability of professional defendants, seeking to ascertain whether there was an arguable case for replacing joint and several liability by, for example, a system whereby each defendant might be liable for only a proportionate share of the loss. Although the remit did not extend to the question of joint and several liability within partnerships, the DTI took the opportunity to consult on the distinct but related question whether to amend the law in Great Britain to allow limited liability partnerships. This question was asked in the knowledge that the concept of LLPs was well known in some overseas jurisdictions, particularly the USA. Jersey too was working on implementing its own LLP legislation in response to representations from the accountancy profession, with a view to attracting offshore registrations.
12. In February 1997 the Department published a consultation paper "Limited Liability Partnerships: A New Form of Business Association for Professions" (URN 97/597). The response to the paper confirmed that there was a demand for the new vehicle across a wide range of professions, and agreement in principle from those consultees who are potential clients of and providers of capital to LLPs. The paper was followed by the publication of a draft Bill and regulations (URN 98/874) in September 1998. The revised draft regulations were published again for consultation, together with the draft Bill (URN 99/1025) in July 1999.
13. The limited liability partnership will have unlimited capacity. This means that an LLP can do anything that a natural person could do. An LLP will, of course, have to operate within the constraints imposed by general law. In addition, a third party dealing with a member of the limited liability partnership will, in general, be entitled to rely on the fact that the member is an agent of the limited liability partnership.
14. As regards the management of the internal affairs of the LLP there is a parallel with the system that operates for partnerships. Members will not be obliged to enter into a formal agreement among themselves and there will be no obligation to publish any agreement which is entered into. As in the case of partnerships, however, there will, in general, be clear advantages in having a formal written agreement between members to regulate the affairs of the undertaking and to avoid disputes between them. The formal procedures needed to establish an LLP, including the need for an application to the registrar of companies, are likely to encourage the members to set up a formal arrangement before the LLP commences business.
15. As regards the taxation of LLPs the decision to tax the profits of the business of an LLP as if it were carried on by partners in partnership, rather than by a body corporate, ensures that the commercial choice between using an LLP or a general partnership is a tax neutral one.
16. The taxation clauses in the Bill are expressed in broad terms so that the existing rules for partnerships and partners will, in general, simply apply to LLPs, and members of LLPs, which are carrying on businesses, as if these were partnerships and partners respectively.
17. A change in the membership of an LLP will have the same effect as a change in the membership of a partnership. In particular, the transfer of an existing business to an LLP will only be treated for tax purposes as giving rise to a cessation of the business of the partnership, which is making the transfer, if in otherwise identical circumstances a transfer between one partnership and another would do so.
18. The transfer of assets between a partnership and an LLP will only give rise to chargeable gain or capital allowance consequences if, in otherwise identical circumstances, a transfer of assets between one partnership and another would so do.
19. There will be no special tax treatments, or reliefs, available to LLPs or members of LLPs beyond the treatments or reliefs that are available to partners and partnerships.
20. Similarly, Inland Revenue Statements of Practice and Extra Statutory Concessions will apply to LLPs and members of LLPs as they apply to partnerships and to partners.
21. The draft Bill was considered by the Trade and Industry Committee of the House of Commons. Their report was published in February 1999 (Fourth Report, Session 1998-1999, HC 59).
COMMENTARY ON CLAUSES
A new form of corporate business association
Subsections (1) to (3). An LLP is a legal person in its own right. It is a body corporate, formed on incorporation (see clause 3). It has unlimited capacity and will, therefore, be able to undertake the full range of business activities which a partnership could undertake. However, while in law an LLP is separate from its members, its members may be liable to contribute to its assets if it is wound up. The extent of that potential liability will be set out in regulations.
Subsection (4) As an LLP will be a body corporate, partnership law will not in general apply to an LLP. Elements of partnership law may, however, be applied to LLPs by regulations made under clause 14.
Subsection (5) This gives effect to the Schedule which contains provisions concerning the name and registered office of an LLP.
Clause 2 sets out the conditions which must be met for an LLP to be incorporated.
Subsection (1) To form an LLP, there must at the outset be at least two people who subscribe to a document called an "incorporation document".The incorporation document must be delivered to the registrar (defined in clause 17).
Subsection (2) The incorporation document must contain various items of information, name, whether the registered office is to be situated in England and Wales, in Wales or in Scotland, the address of the registered office, the name of the persons who are to be members on incorporation and whether some or all of the members are to be designated members.
Subsection (1) When the registrar receives the incorporation document he will retain and register it.
Subsection (2) Once the documents have been registered, the registrar will issue a certificate that the LLP is incorporated by the name specified in the incorporation document.
Subsection (4) The certificate issued by the registrar is evidence that all requirements have been complied with.
Subsection (1) The first members of an LLP are those who signed the incorporation document.
Subsection (2) After incorporation, any person can become a member of an LLP by agreement with the existing members.
Subsection (3) A person may cease to be a member in accordance with any agreement with the other members of the LLP.
Subsection (1) deals with the relationship between members. The rights and duties of the members of an LLP to one another and to the LLP are governed by the provisions of any agreement between the members, subject to the provisions of the incorporation document. The Bill does not oblige its members to have such an agreement and there is no requirement to publish it.
Subsection (2) provides that when an LLP comes into being it is bound by the terms of any agreement that is entered into by the persons who sign the incorporation document.
Subsection (1) Each member of the LLP is an agent of the LLP. Each member may, therefore, represent and act on behalf of the LLP in all its business (subject to subsection (2)).
Subsection (2) An LLP is not, however, bound by the actions of a member where that member has no authority to act for the LLP, and the person dealing with the member is aware of this or does not know that the member was in fact a member of the LLP.
Subsection (3) Transactions with a person who is no longer a member of an LLP are still valid transactions with the LLP, unless the other party has been told that the person is no longer a member, or the registrar has received a notice to that effect.
This concerns the situation where a person ceases to be a member of an LLP, or his interest in the LLP is transferred to another person. A former member, the member's personal representatives, the member's trustee in bankruptcy or liquidator or the trustees under the trust deed for the benefit of his creditors or assignee may receive any amount to which the former member would have been entitled, but may not interfere with the management or administration of the LLP.
Subsection (1) provides that, where the incorporation document specifies who the designated members are, then they will be the designated members on incorporation. Other members may become a designated member where it is agreed to by the members.
Subsection (2) requires there to be at least two designated members.
Subsection (3) covers situations where the incorporation document states that every person who is a member of an LLP is a designated member.
Subsection (4) covers when the LLP should notify the registrar that all members of the LLP are designated members or that specified members will be designated. Where the LLP notifies the registrar it will the effect will be as though it had been stated in the incorporation document.
Subsection (5) explains that the notification under subsection (4) should be in a form that is approved by the registrar and be signed by a designated member.
Subsection (6) explains that when a person ceases to be member of the LLP they will also cease to be a designated member.
Registration of membership changes
Subsection (1) provides that, where a person ceases to be a member or a designated member the registrar must be notified within fourteen days and that a change in the name and address of a member must be notified in twenty one days.
Subsection (2) states that where all the members of an LLP are designated members notification only needs to be given that a person has ceased to be member.
Subsection (4) provides that, where subsection (1) is not complied with the LLP and all designated members will commit an offence.
Subsection (5) explains that a defence to subsection (4) is available for designated members if they can prove that they took all reasonable steps to ensure that subsection (1) was complied with.
Subsection (6) explains that where a person is guilty of an offence under subsection (4) they would be liable to a fine.
This clause ensures that the members of an LLP which is carrying on a business are treated for the purposes of income tax and capital gains tax as if they were partners carrying on a business in partnership, despite the fact that clause 1(3) of the Bill establishes an LLP as a body corporate.
Subsection (1) provides that, for the purposes of the acts relating to income tax and corporation tax, a trade, profession or partnership carried on by an LLP shall be treated as carried on by the members of the LLP as partners carrying on a trade profession or business in partnership. It also provides that the property of the LLP shall be treated for those purposes as partnership property. This ensures that, like partners, the members will be individually liable to tax on their shares of the profits of the trade, profession or business carried on by the LLP.
Subsection (2) provides that for capital gains tax purposes the assets of the LLP shall be treated as assets held by the members as partners. This ensures that, like partners, the members will be individually liable to tax for chargeable gains on the disposal of LLP assets. The corollary of this is that an acquisition or disposal will not be treated as being made by the LLP itself.
This clause inserts a new section in the Inheritance Tax Act 1984. This provides that for inheritance tax purposes the members of an LLP are treated as if partners in a partnership. This ensures that inheritance tax will be charged in respect of members' interests in an LLP as it is in respect of partners' interests in a partnership, and that business relief will be available on the same basis.
Subsection (1) provides for relief from stamp duty on an instrument transferring property from a partnership to a newly incorporated LLP. The relief is conditional on the membership of the partnership and the LLP being the same and on those members' interests in the property transferred by the instrument being the same.
Subsection (2) sets out the circumstances in which transfer instruments falling within subsection (1) are to be regarded as duly stamped.
Subsection (1) The Secretary of State is required to make regulations applying or incorporating, with such modifications as appear appropriate, Parts I to IV, VI and VII of the Insolvency Act 1986.
The Insolvency Act provides a comprehensive code of procedures relating to both corporate and individual insolvency. This ensures that the major corporate insolvency and winding up procedures are applied to LLPs, including company voluntary arrangements, administration, receivership and voluntary and compulsory winding up. Such procedures will be adapted as necessary to suit LLPs.
Subsection (2) The Secretary of State may make regulations about the winding up and insolvency of an LLP or an oversea limited liability partnership by applying with or without modifications any law relating to the insolvency or winding up of companies or other corporations.
Subsection (3) defines an oversea limited liability partnership.
There is at this stage no intention to exercise the power in relation to oversea limited liability partnerships and any prior decision to do so will be subject to separate consultation.
Clause 14 allows the Secretary of State to make regulations applying the law relating to corporations, companies and partnerships (with appropriate modifications) to LLPs.
This clause allows for enactments, in particular those affecting companies, corporations or partnerships, to be amended in consequence of the provisions in the Bill or of any regulations which may be made under it.
This clause provides that regulations for which the Bill provides will be made by the Secretary of State. It makes other general provision about regulations, and in particular allows regulations to provide that failure to comply with their requirements is a criminal offence. The clause provides which of the regulations require the affirmative resolution procedure.
Subsection (3) is designed to enable the regulation-making functions relating to the process of winding up of a Scottish LLP to be exercised by Scottish Ministers.
Part I - Names
The name of a LLP must end with "limited liability partnership; llp or LLP". Should the incorporation document give the registered office as situated in Wales it must end with either "limited liability partnership; partneriaeth atebolrwydd cyfngedig; llp; LLP; pac or PAC".
An LLP can only be registered by a name which has one of the above expressions or abbreviations at the end of it. Neither can it have a name that is already used by a registered company, nor which the Secretary of State thinks is a criminal or offensive.
An LLP shall not be registered by a name that is likely to give the impression that it is connected with HM Government or with a local authority.
An LLP can change its name at any time. However, where an LLP has registered by a name which, in the opinion of the Secretary of State is misleading or the same or very similar to one already used by a registered company, the Secretary of State may direct the LLP to change its name.
Should an LLP trade or carry on business using the expression "limited liability partnership or partneriaeth atebolrwydd cyfyngedig" or an imitation of either expressions the person who does so and is not registered as an LLP will be liable to summary conviction.
An LLP can at any time change its name and when this happens should notify the registrar in a approved form which is signed by a designated member of the LLP. Once the registrar has received notification a certificate of change of name will be issued and the change will be effective from the date of issue.
Changing the name of the LLP will not affect any of its rights and obligations, or make any difference to legal proceeding by or against it.
Part II - Registered Offices
An LLP has to have a registered office at all times and this must be situated in either England and Wales, Wales or Scotland. Details of the LLPs registered office must be included in the incorporation document. Notification can be sent to the registrar that the registered office is in Wales even though the incorporation document does not provide that it is situated in Wales.
An LLP can change its registered office by sending notification to the registrar in a approved form signed by a designated member. When the notification is received by the registrar and for the next fourteen days a document may be validly served on the LLP at its former registered office.
EFFECTS OF THE BILL ON PUBLIC SECTOR FINANCES
22. There is no net public expenditure cost arising from the administration of the provisions of the Bill. Companies House expects to recover the costs of registering and maintaining records of the affairs of the new LLPs, including the development costs of new systems, by charging fees as it already does in the case of companies.
EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER
23. The Bill will not require any increase in the number of permanent staff in the public service.
SUMMARY OF THE REGULATORY APPRAISAL
24. Becoming an LLP will be purely voluntary.
25. The Bill will come into force on such a day as the Secretary of State shall determine.
EUROPEAN CONVENTION ON HUMAN RIGHTS
26. Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement before Second Reading about the compatibility of the provisions of the Bill with the convention rights (as defined by section 1 of that Act). On 23rd November 1999 the Lord McIntosh of Haringey made the following statement:
In my view the provisions of the Limited Liability Partnerships Bill [H.L] are compatible with the Convention rights.
|© Parliamentary copyright 1999||Prepared: 24 November 1999|