Analysis of Limited Liability Partnership - Essay Example

? BUSINESS LAW Limited Liability Partnership …………………. College/ ………….. …………. Introduction A business can be of different type and structure in terms of its ownership. Sole trading, perhaps the most common type of business ownership, and partnership are of unlimited liability as its owners are always legally liable for the debts of the business regardless of the capital they brought to the business. Joint stock companies, including both private and public, are limited liability firm as its owners, shareholders or investors, are liable only up to the amounts they brought as capital regardless of the debts of the firm. Limited Liability Partnership is relatively a newer and hybrid form of business that provides its owners, say partners, with advantages of a limited liability company. This piece of research paper attempts to draft a brief explanation about limited liability partnership, by comparing features, advantages and disadvantages of both ‘partnership’ and ‘limited liability’. This paper will detail legal aspects limited liability, binding of limited liability partnership agreement, separate legal entity and various other important business concepts. Limited Liability Partnership The Limited Liability Partnership (LLP) is a form of business designed and developed mostly for professionals like attorneys, lawyers and accountants, who normally like to do business in a partnership form (Miller and Jentz 2009, p. 538). It is relatively a newer form of partnership that allows professionals the tax benefits of partnership while taking advantages by avoiding personal liabilities for the malpractice or otherwise dishonest activities of other partners (Kuratko 2008, p. 197). Limited liability partnership is very similar to limited liability companies in terms of liability of the business created by the practice of other partners. In partnership, it is very likely that innocent partners also may get liable for the wrong-doings of other partners, but such liability arising out of others’ doings that cannot be legally or in terms of business justified can be shielded up to an extent by forming a limited liability partnership or converting the existing partnership to LLP form. Limited liability partnership is very similar to the limited liability company except that LLPs are designed mainly for professionals who normally do business in partnership. As (Kuratko 2008, p. 197) discussed, limited liability companies are legally required to be compliant and strictly adherent to the concerned country’s prevailing company registration law. Similarly, LLPs are also required to be compliant with the state statues; for instance Bahraini Law, or UK law etc. As Miller and Jentz (2009, p. 538) pointed, the major advantages of limited liability partnership is that it allows a partnership to continue as a pass-through entity for tax purposes, but limits the liability of partners. This form of business ownership has advantages of corporate limited liability and at the same time the members of the firm can define the sustentative relationship between partners by an agreement between themselves. This form of business is a separate legal entity ‘owned’ by the members themselves (Ahmadu and Hughes 2006, p. 14). Moye (2004, p. 74) has outlined a legal perspective on limited liability partnership. According to him, limited liability partnership is an existing general partnership that is converted or a new partnership that is formed in a way that its individual partners will be shielded from personal liability, except to the extent of debts or liabilities caused by partners’ own conduct or as otherwise provided by the partnership agreement. Legally, both limited liability partnership and agency are closely related in relation to their liabilities. An agent is personally liable for his own conduct and similarly a partner in limited liability partnership is personally liable for his own conduct or any loss caused by his malpractice (Moye 2004, p. 74). Liability in LLPs Limited liability partnership firms are mainly intended for those professionals who like to do business with friends or family with similar qualifications like lawyers or accountants etc. one of the main disadvantages of general partnership is its unlimited personal liability of its partners. But, LLPs allow professionals to avoid personal liability for the malpractice of other partners. In an LLP partnership firm, as different from general partnership, a partner is not liable for the risks or losses arisen out of wrong-doing of other partners, mainly those activities that cannot be justified on the ground of business and law (Miller and Jentz 2009, p. 539). Creating a limited liability partnership An informal or private and voluntary agreement is usually enough for creating a general partnership firm, but it is not so in the case of limited liability partnership. The agreement for the formation and any other procedure for the formation of a limited liability partnership must be public and formal. Both or all the parties to the partnership must follow specific statutory requirements and the partners need to file a certificate with the state (Miller and Jentz 2009, p. 539). As mentioned earlier, limited liability partnership is formed according to the requirements of state statues. Limited liability partnership firms are generally created from an existing partnership, though the formation of the partnership and election process of limited liability status may be done simultaneously. For the formation of limited liability partnership, a vote of all partners is required and it will be considered legally valid only after a statement of qualification, mainly with regard to limited liability terms, has been duly filed with the secretary of the state (Schneeman 2009, p. 166). For the formation of any type of partnership, a partnership agreement, often termed as partnership deed, is of greater significance. The same is highly important for the formation of limited liability partnership as well. A partnership agreement in the case of LLP will govern on all matters that are not addressed by the state statute or that are addressed by the statute but have been amended in a valid partnership agreement (Schneeman 2009, p. 166). Two or more persons carrying on a business with a view to make profit, or have been running a general partnership, must subscribe their names to an incorporation document. These partners are designated members and they are responsible to send any valuable information to the concerned bodies in the country, like Companies House. Legally, the minimum requirement of numbers of partners for a limited liability partnership is two. Statement of qualification and incorporation document are used interchangeably. Voting for the limited liability When an existing partnership is to be converted in to the limited liability partnership firm, the same numbers of partners are required to approve an amendment to the partnership agreement to vote for the approval of limited liability election. More often, an unanimous voting is required (Schneeman 2009, p. 166). Statement of Qualification/ Incorporation document A limited liability partnership is formed when a statement of qualification is filed with the secretary or concerned body of the state or appropriate body officials. A statement of qualification must state that the partnership has chosen its structure to be ‘limited liability partnership’, in accordance with the statutory requirements, and it also includes all the necessary and relevant information required by the statute (Schneeman 2009, p. 167). The statement of qualification of the limited liability partnership must set forth: The name of the partnership firm, The address of the firm in detail, including its head-office, chief executive office, street address, and the addresses of business location or other offices if any at different places, If the partnership has any agency or agent at different places, the name and detailed addresses of the agents, A statement showing that partners have elected or chosen limited liability partnership, A deferred effective date etc (Schneeman 2009, p. 167). The name of the limited liability partnership should include the words ‘limited liability partnership’ or ‘registered limited liability partnership’ or abbreviations like ‘LLP’ etc. One of the very significant contents of the statement of qualification is the statement regarding the ‘limited liability partnership’ as being elected by the partners, because, LLP is required to be legally binding so that a partners will be shielded from any likely risks or losses due to wrong-doing of other partners. Apart from the statement of qualification, a partnership agreement, or as generally termed as partnership deed must be drafted in order to clear matters regarding capitals, profit and loss sharing etc. Conclusion Limited liability partnership is a hybrid form of business with advantages of partnership as well as limited liability. It is rather a new form of business mainly for professionals like accountants, auditors and lawyers to help them run a business effectively by maintaining a tool that helps them get shielded from any likely risks or losses that are caused by the wrong-doings of other partners. This piece of research paper has discussed meaning and legal perspectives of limited liability partnership in relation to the liability of partners, its important statutory requirements like statement of qualification and other relevant documents to be filed with the concerned body or legal authority. References Ahmadu, ML & Hughes, RA 2006, Commercial law and practice in the South Pacific, Routledge Kuratko, DF 2008, Entrepreneurship: Theory, Process, and Practice, Eighth illustrated edition, Cengage Learning Miller, RL & Jentz, GA 2009, Fundamentals of Business Law: Excerpted Cases, Second edition, Cengage Learning Moye, JE 2004, The law of business organizations, Sixth illustrated edition, Cengage Learning Schneeman, A 2009, Law of Corporations and Other Business Organizations, Fifth illustrated edition, Cengage Learning Read More