Forget agonising over whether to set up as a sole trader, partnership or limited company. The limited partnership has arrived and, Andreas Loucaides reports, offers previously unavailable benefits
The fanfares may have been muted, but during the first few weeks of 2001 several new pieces of legislation came into force which could have a significant impact on the professional indemnity and liability requirements of many businesses.
Risk managers and brokers should be acquainting themselves with these and other laws just around the corner, and gauging how they will alter the exposures their clients face.
Readers may be familiar with the Limited Liability Partnerships Act 2000, which was implemented on April 6. It creates a fourth way to structure a business, adding to the options of sole trader, partnership and limited company.
The concept of a limited liability partnership (or LLP) was debated in the UK as long ago as the
early 1990s. The growing number of asset-depleting negligence actions against the largest accountancy firms was raising fears among those in the profession that the exposures faced by individuals, solely as a result of acting in the normal course of their duties, were too high.
Now, LLP status is available to all types of businesses that have been formed to make a profit. It is not restricted to the traditional professions.
By converting to LLP status, a partnership is able to protect the personal wealth of non-negligent “members” (previously called partners) beyond their capital commitment to the partnership. The partnership becomes a separate legal entity in its own right. Individual members, though, will remain fully liable for their own negligent acts.
This is different from the situation in a traditional partnership, where each partner is jointly and severally liable for the acts or omissions of their fellow partners, as well as for their own.
The LLP Act makes reference to two types of member, distinguishing “designated members” from “members”. Designated members must be named at the time of incorporation or all members will be deemed designated.
The act itself does not go into specific detail as to how these individuals' roles differ from those of ordinary members. But the notes that accompany it suggest that the role of the designated member will be administrative, perhaps similar to that of a company secretary.
Another view is that the roles are similar to that of director and shadow director. Time, and case law, will no doubt clarify the position.
In the March 2001 Budget, it was confirmed that those wishing to convert to LLP status need not be concerned about facing increased tax liabilities. Measures to prevent tax loss as a result of conversion to LLP, and to confirm that they will continue to be treated as partnerships for tax purposes, were brought into effect on April 6 to coincide with the implementation of the act.
Of course, the opportunity to limit potential exposures in this way has a downside. There is additional bureaucracy, such as the need to register the partnership, to make public disclosure of its finances by filing accounts annually, and to notify changes to its membership, all accompanied by fines for non-compliance.
It will be interesting to see to what extent firms consider these burdens to be a worthwhile price to pay for the increased individual security a limited liability partnership will provide.
The implications for a firm's professional indemnity insurance are relatively straightforward. A single policy in the name of the LLP, covering claims against its individual members as well as the LLP and with a suitable limit of indemnity, should suffice.
It is anticipated that most legal actions will be brought against the LLP itself, although there may be circumstances where an individual member can be identified as being at fault.
Perhaps the most interesting consideration, however, will be the directors' & officers' (D&O) exposures now faced by the members and designated members of the LLP.
Although there will be no possibility of shareholder actions, the act does foreshadow claims for wrongful trading in the event of the insolvency of the LLP, and criminal actions for failing to file accounts.
As new regulations are made, by applying or incorporating parts of the Insolvency Act 1986 and the Companies Act 1985, the traditional D&O exposures faced by a company will apply increasingly to LLPs.
Any professional partnership converting to LLP status must now seriously consider obtaining D&O coverage, suitably tailored to respond to claims against both members and designated members, and providing an indemnity in respect of legal costs incurred, for example in relation to representation at an official enquiry.
The Limited Liability Partnerships Act is just one of the legislative developments relating to management, or the provision of professional services, to come into effect in the first part of 2001.
Early indications suggest that many professional firms will opt for this form of incorporation, although it is not the ideal solution for all.