348 Chapter 12Partnership, limited liability partnership and choice of legal status
Are LLPs more like companies or partnerships?
Limited liability partnerships share some of the characteristics of limited companies and
some of the characteristics of ordinary partnerships.
Like shareholders in limited companies, the members of LLPs have limited liability for
the debts of the business and, like companies, LLPs can also give the LLP’s assets as security
for a loan by way of floating charge. However, capital cannot be raised by selling shares to
people who have no desire to manage the business. Other similarities are that LLPs have
perpetual succession, are formed by registration with the Registrar of Companies and have
to submit an annual return.
However, LLPs are similar to partnerships in that the members of the LLP manage the
business, and are the agents of it, and the members pay income tax rather than the business
paying corporation tax.
Members of an LLP can always leave the business by giving notice. However, as this
does not automatically dissolve the LLP the member who leaves will have no automatic
right to share in the assets of the LLP. Members who want to leave could therefore find
themselves in a vulnerable position unless the LLP agreement or the rules on minority
protection give them help.Company, partnership or limited liability partnership?
Choice of legal status
A person wishing to go into business with other people must trade either as a company, a
partnership or a limited liability partnership. People going into business together must
therefore choose what sort of business organisation they wish to form. Often they might
have very clear views. They might be quite sure that they want to trade either as a company,
a partnership or an LLP. In many other cases, however, the choice may not be so clear-cut.
When a business is being set up there are often many matters requiring urgent attention.
Perhaps staff must be employed, money borrowed or premises leased. It is easy to regard
the decision as to the legal status of the business as less pressing. However, the choice is
a very important one. Prospective business people should consider the advantages and
disadvantages of companies, partnerships and LLPs in some detail.Limited liability
In Chapter 10 we examined Salomon vSalomon & Co Ltdand saw that shareholders in a
limited company cannot be required to pay the debts of the company. In a similar way, the
members of an LLP are not liable to pay the debts of the LLP. Partners, on the other hand,
are completely liable for the firm’s debts to the full extent of their personal fortune. This is,
perhaps, the principal disadvantage of a partnership.
There is another side to limited liability, though, and that is that creditors may be much
less willing to extend credit to a small company, or to an LLP, than they would be to a part-
nership. Suppliers dealing with a partnership need not have any worries about getting paid
as long as they know that some, or all, of the partners are financially sound. However, sup-
pliers dealing with a small company or an LLP should be very careful. If the business fails,
suppliers who are owed money are likely to be unsecured creditors and to find themselves
at the back of the queue. When a company or LLP is insolvent, the unsecured creditors will
not receive full payment of their debts and may well be paid nothing.