LLPs & LPs
LLPs, or limited liability partnerships, shouldn’t be confused with LPs, or limited partnerships. The latter is much older, having existed at least since 1907 when the Limited Partnerships Act was passed. LPs are different from LLPs in that they are not bodies corporate and have to have at least one partner whose personal liability is unlimited. If a partner has limited liability, he can’t take any part in the conduct of the LP’s trade.
LPs have, therefore, always been something of a niche entity. Currently they are popular vehicles for individual investments by hedge funds in which the hedge fund managers can take direct personal stakes on a limited partner basis; and because they are basically simply investors, the LP structure is ideal in doing this without the tax complications of putting a limited company in between the hedge fund investor and the business.
But for the general purposes of this report, it has to be said that LPs are of very restricted interest, especially now that LLPs exist and can secure basically the same tax benefits (of direct participation in ownership of the business or investment) without the restrictions on input into the management of the business, etc., that an LP brings with it.
Who Would Use An LLP?
There is a mythology out there that LLP’s are really just for accountants and lawyers. Certainly, the history of the introduction of this particular corporate vehicle has something to do with their being associated in the public mind with large professional firms of this sort. Accountants, in particular, wanted something which would give them limited liability, in short, at the same time as enjoying the benefits of personal self-employment status, enjoyed by all of the partners. It’s not surprising that the first LLP, and probably the majority of the first few, were large firms of accountants.
The reality, though, is that LLPs are suitable for all kinds of business, whether professional, trading, or investment. Investment LLPs, in particular, are specifically envisaged by the legislation and commentaries.
The LLP As An Asset Protection Vehicle
So, the reasons why we are devoting a chapter to LLPs in this report on asset protection are probably sufficiently obvious. Like limited companies, LLPs can ‘ring fence’ business liabilities from the personal financial situation of the members of the LLP.
As with a company, the limited liability protection which is afforded by an LLP can be restricted in certain ways. If an individual member of an LLP gives a personal guarantee to any creditor (usually a bank) the bank can pursue that individual member if the LLP doesn’t pay its bank loan back.
As with companies, victims of negligence or purported negligence on the part of an individual LLP member can sue that member as well as the LLP to recover what he says he has lost. From the tax point of view, the LLP provides protection against pay as you earn or VAT liabilities that are not paid over to the Revenue for various reasons; but unlike a company, the tax bill on the LLP’s profits is a personal liability of the members, and not a liability of the LLP itself. (In this way, as in most others, the LLP follows the way an unincorporated partnership works.)
On the other hand, as with companies, it is possible to set up a ‘group’ structure, with the valuable fixed assets of the business, perhaps, held within a ‘holding LLP’ which is then, in turn, a member of a ‘subsidiary’, trading LLP. As with companies, the idea, here, is that any catastrophic financial disaster striking the trading entity, being the subsidiary LLP, will leave the assets of the holding LLP unscathed.
By Alan Pink