Limited Liability Partnerships Essay Example | Topics and Well Written Essays - 1250 words

Limited Liability Partnerships - Essay Example While a limited company is formulated as a legal entity where limited liability exists, this was not so in the case of partnerships, which were not legal entities and thereby made partners legally liable for all the firm's debts. The Limited Liability Partnership has the following features (a) it has a separate legal personality (b) liabilities of individual members are limited to the amount they agree to pay in the event of an insolvency (c) partners are expected to adhere to the duties and obligations currently imposed upon Directors of Companies (d) the LLP is not expected to hold AGMs or observe the rules for shareholder protection set out in the Companies Act and (e) agreements about how the affairs of the LLP will be run are left to the discretion of individual members, but partners are entitled to share in the management of the firm on an equal basis (Davies, 2001). Dr. Michael Twomey, a partnership lawyer, points out the advantages of a partnership. Firstly, it allows the partners the freedom and flexibility to conduct the Company's affairs as they wish and are not subject to the provisions of Company law. Secondly, they are not required to file accounts; hence their accounts are not publicly scrutinized. Thirdly, since a partnership is not a legal entity, hence no partnership tax is levied and the firm does not pay tax, only the partners do(MOE, 2002). But this singular advantage offered by partnerships, of privacy in the manner in which internal operations of the firm are conducted, is eliminated by way of the LLP, because such privacy can no longer be retained when LLPs are required to file audited accounts at the Companies House and to also disclose information about profits and the share of profits accruing to the highest earning partner (Davies, 2001). As a result, the financial affairs of partnerships will now be brought under public scrutiny and partners will be required to divulge details of profits accrued as well as shares of such profits that are being routed to the partners. One of the reasons why the LLP has been advanced is to mitigate the legal liability of partners for the debts of the firm. This need was especially highlighted in the aftermath of scandals such as Enron, where the Arthur Anderson partners who were not theoretically related to the Enron case, could still be held liable for repayment of debts. But in practice, companies in Britain have not demonstrated any eagerness in coming forward to be incorporated as LLPs. As pointed out by Towmey (MOE, 2002), Clifford Chance, the biggest law firm in London, chose to become an LLP based in America rather than an LLP based in Britian, because in effect, the LLP in Britain has lost all the advantages of financial privacy and flexibility of a partnership. While a partnership was earlier not taxed, most of the principles of Company law have now been applied to it under the LLP format, as a result of which it has to function as if it is a Company rather than a partnership. Thus, it may be noted that the LLP has failed to address one of the most pressing reasons why it was introduced, i.e., the need to ensure that partners are not held liable for the firm's debts. This aspect was vital especially in the case of small businesses where incorporating as a Company is not a feasible option because it involves too much expense and