Partnerships and Limited Liability Partnerships

 

Introduction

            Common law has for years acknowledged the existence of partnerships under English commercial law. In fact, partnerships have been in existence for as long as business transactions have been in existence dating back to ancient Roman law that referred to this phenomenon as trade partnerships. However, before the year 1980 that saw the coming into effect of the Partnership Act 1980, the U.K law on partnership heavily relied on case law for guidance. One of the earliest case laws on partnerships included Waugh v Carver (1793) 126 ER 525, 2 HBI 235 where the courts held that the ‘receipt of profits of partnership made the recipient a partner’.

            However, partnership law soon hit a snug of sorts concerning it definition when other types of partners were introduced into the picture such as sleeping partners. These were partners that did not participate in the daily management of the partnership. On one hand, the Partnership act 1980 pointed out in section 1 the fact that Partners are jointly and severally liable, just as they own the property in common. This meant that all partners including the sleeping ones were liable as far as the partnership was concerned (Vermeulen 2003, p.279). Sleeping partners were soon protected under the Limited Partnership Act 1907 which stated that if a particular partnership included sleeping partners, then these partners were entitled to limited liability beyond their investment in the partnership under section 6.

            The introduction of limited liability for the sleeping partners meant that by definition, this type of agreement was changing form and taking on the form of a company. Statute sought to remedy this confusion by introducing the Limited Liability Partnerships Act 2000. This particular statute provided for the fact that partnerships that took on limited liability nature were deemed to have legal personality (Fibbe 2009, p.338). This gave them the same privileges as those given to limited companies.

            Thus, the definition of partnerships and limited liability partnerships has been able to differ not only by virtue of the different statutes that govern them, but also by their creation, existence as well as dissolution.

Creation

Partnership

            A partnership is created under section 1 of the partnership act 1980, when a legal relationship between two people or more carry on a business in the hopes of making a profit and subsequently sharing that profit amongst them. For this to be a partnership, the participants must not have filed papers that identify the entity as either a corporation or a limited corporation company. Once created as a partnership, it can then only be considered as such after the trading has been carried out as was established in Dickinson v Valpy (1829) 10 B & C 128. Statute as well as case law have both sought to expound on the definitions of both what can constitute a ‘trade’ under section 54 of the act as well what encompass the partnership definition (Morse 2010, p.45).

            The law is clear on the fact that the partnership can only be considered as such if there is the carrying on of business in common as was the case in George Hall & Son v Platt [1954] TR 331. Statute provides that there has to be a co-ownership of property and this has to be evidenced in the books as was the case in Re Hulton, Hulton v Lister (1890) 62 LT 200, CA. The sharing of profit is an important aspect in the determination of whether a partnership exists in the first place but is not necessarily evidence that may be used in a court of law for the terms of the agreement to partnership must be outlined as is the case under section 2(3) of the act. Finally, under section 14 a partnership comes into existence where the partners declare the fact that they are indeed partners to that particular business (Cahn & Donald 2010, p.41).

Limited liability partnerships (LLP)

            Limited liability partnerships (LLP) on the other hand are formed under the Limited Liability Partnerships Act 2000. Section 1 (2) of the act goes ahead to state that any particular Limited liability partnership is formed by being incorporated under the act. Unlike, the partnership that is formed upon agreement of the partners, this particular partnership can only come into force when the LLP's certificate of incorporation is dated by the Registrar of Companies. Thus, it is important to note that only incorporation can give effect to this type of partnership. By virtue of section 1 (3), LLPs generally have an unlimited capacity. This means that they have no restrictions placed on their operations and can therefore do anything that any other legal person can do (Blackett-Ord & Haren 2011, p.434). In fact, LLPs take on a partnership nature by not being required to state the purpose of their business unlike other legal entities that are incorporated. These particular partnerships have no restrictions as to the maximum number of members in a particular partnership but have a minimum requirement of two partners under section 2 (1) (a).

Liability

            General partnership is unique in that it has no legal identity or corporate personality that would legally separate it from its partners. This was determined in Sadler v Whiteman [1910] 1 KB 868. It means therefore that the partnership is the partners and n the other hand the partners make the partnership, section 4 of the Partnership Act 1980. This means that the rights as well as the liabilities of that particular partnership also belong to the partners. Therefore, any liability that is accrued by the partnership is enforceable against the individual partners in the partnership. This term is also referred to unlimited liability on the part of the partners which grants debtors permission to go after the partners should the partnership default (Smith & Young 2012, p.143).

            On the other hand, LLPs have legal identities. This means that they are have a continuous legal existence independent of their members. This also means that any liability that may arise from this particular partnership is the responsibility of the partnership and that by virtue of incorporation; the partners/members cannot be touched. Thus, the liability is limited to the partnership only (Blackett-Ord 2007, p.1009).

Dissolution

           The dissolution of a partnership can take place on certain grounds under statute. These are under sections 32,33,34 and 35. The first is if the partnership was set for a particular duration of time and that time had lapsed. The second is if the particular partnership had been set for a particular purpose/venture and that venture had subsequently terminated. The third reason is the death or bankruptcy of a partner in the partnership. However, some partnership agreements have clauses that negate this stipulation meaning that the removal of one partner means that the partnership may continue. Subsequent illegality or an event that may make the partnership illegal may lead to its dissolution. A partnership may also cease to exist where a partner gives notice or where a partner applies to court for a court order for the dissolution of the partnership (Milman & Flanagan 1983, p.120). Upon the dissolution of the partnership, the partners are expected to share whether it is the profits or the losses that arose from the venture.

            On the other hand, the dissolution of an LLP can take place under a number of circumstances. The first is if the name of the LLP is struck off the register as per section 3 of the Limited Liability Partnerships Act 2000. Subsequently, an LLP can be terminated where there are just two members. Given the fact that it is a legal entity, even if one member were leave and the others remain and they choose to continue the LLP, they are allowed to do so. It should be noted that given the nature of the LLP, when the members agree to a dissolution and the LLP becomes insolvent, then creditors can winding up proceedings as they would in a limited company’s case. These proceedings are however under the insolvency act 1986 and the CDDA 1986 legislations (Armour 2001, p.590). Here, the members will then contribute the amount they had agreed upon in the LLP agreement. In this scenario, their personal assets are safe unlike in a partnership agreement.

Conclusion

            Partnership is a commercial law element that has survived the test of time. However, over that period, partnership as a context has evolved creating a gap that required legal intervention. Thus, the emergence of complicated partnerships has led to the creation of a hybrid system that has created partnerships that have taken on legal entity forms, limited liability partnership. This has ultimately been an asset and a big win for the partners who more often than not always ended up losing upon the dissolution of the partnership.

 

References

Armour, D. (2001). Tolley's limited liability partnerships: the new legislation. Croydon, Surrey, Tolley.

Blackett-Ord, M. (2007). Partnership law: the modern law of firms, limited partnerships and  LLPs. Haywards Heath, West Sussex, Tottel Publishing.

Blackett-Ord, M., & Haren, S. (2011). Partnership law: the modern law of firms, limited partnerships and LLPs. Haywards Heath, Bloomsbury Professional.

Cahn, A., & Donald, D. C. (2010). Comparative company law: text and cases on the laws governing corporations in Germany, the UK and the USA. Cambridge [etc.], Cambridge University Press.

Fibbe, G. K. (2009). EC law aspects of hybrid entities. Amsterdam, The Netherlands, IBFD.

            Liability Partnerships Act 2000

Milman, D., & Flanagan, T. (1983). Modern partnership law. London ;Canberra, Croom Helm.

Morse, G. (2010). Partnership law. Oxford, Oxford University Press.

Partnership Act 1980

Smith, P., & Young, S. (2012). Limited liability partnerships handbook. Haywards Heath, West Sussex, Bloomsbury Professional.

Vermeulen, E. M. (2003). The evolution of legal business forms in Europe and the United States: venture capital, joint venture and partnership structures. The Hague, Kluwer Law International.