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LIMITED LIABILITY PARTNERSHIPS BILL

EXPLANATORY AND FINANCIAL MEMORANDUM

INTRODUCTION
  1. This Explanatory and Financial Memorandum relates to the Limited Liability Partnerships Bill. It has been prepared by the Department of Enterprise, Trade and Investment ('the Department') in order to assist the reader of the Bill and to help inform debate on it. The Memorandum does not form part of the Bill and has not been endorsed by the Assembly.
  2. The Memorandum needs to be read in conjunction with the Bill. It is not, and is not meant to be a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
    3. BACKGROUND AND POLICY OBJECTIVES
  3. The present system of companies, partnerships and sole traders in the UK is rooted in 19th century legislation and business practice. Under current legislation, people who wish to take an active part in the business they own, while at the same time limiting their personal liability for the debts of the business, have to organise the business as a company. As a result they must constitute themselves as directors and shareholders with a declared share capital and observe elaborate and sometimes difficult to understand rules, which derive in part from a theoretical separation of ownership, and management that may not reflect their actual circumstances.
  4. A number of professions in the UK proposed that as an alternative to trading as a simple partnership they should be given the opportunity to trade as limited liability partnerships. A limited liability partnership ("LLP") would be incorporated and exist as a legal entity separate from its members. It would combine the advantage of limiting members' liability in the event of the business being wound up with the organisational flexibility of a partnership, the partnership practice of distributing the profits to members annually and the associated partnership basis of taxation.
  5. In Great Britain the Government has responded by bringing forward the Limited Liability Partnerships Act 2000, which received Royal Assent on 20 July 2000, and supporting regulations, which came into force from 6 April 2001. The Act has provided the first fundamental innovation in this area of Company Law in more than a century. It provides an opportunity for individuals to carry on business in partnerships subject to limited liability, while offering to persons dealing with such partnerships, safeguards similar to those applying in respect of limited companies.
  6. In Northern Ireland there are about 20,000 limited companies and about 13,400 partnerships. The latter are especially common in the professions such as the law, accountancy and medicine but can be found in all areas of business and industry, for example, retail, construction, manufacturing, restaurants, health and estate agents.
  7. The decision to become an LLP will be a voluntary one, based on commercial considerations.
    8. PURPOSE OF THE BILL AND SUMMARY OF ITS MAIN PROVISIONS
  8. The primary purpose of the Bill is to enable all businesses of two or more members to incorporate with limited liability while organising themselves as partnerships, not as companies. The legislation will extend the range of legal organisations available to such businesses in Northern Ireland beyond the limited company and the traditional form of partnership. This will provide Northern Ireland business with potential benefits from the LLP vehicle currently available in GB and in similar form in other jurisdictions such as USA, Canada and Australia. It is also intended to reduce the risk of NI firms deciding to register in other jurisdictions in order to become LLPs.
  9. The Bill will provide for:
CONSULTATION
  1. The consultation process was undertaken over the period October 2001 to January 2002. A wide range of firms and businesses were consulted on the proposed regime. These included the Federation of Small Businesses and the National Federation of Self Employed and Small Business, as well as enterprise bodies and the accountancy and legal professions. Voluntary and community organisations representing Section 75 groups were also consulted.
  2. All respondents endorsed the general principles behind the Bill.
    3. OPTIONS CONSIDERED
  3. The two options identified and considered were (i) to continue to rely on present Northern Ireland business partnership legislation; or (ii) to introduce new legislation to make available the Limited Liability Partnership (LLP) in Northern Ireland.
  4. The assessment process concluded that Option (ii) would provide Northern Ireland business with the potential benefits from the LLP organisation currently available in GB and in similar form in other jurisdictions. It would also ensure that partnership legislation remains relevant to the needs of the Northern Ireland economy.
    5. OVERVIEW
  5. The Bill has 16 clauses and 1 Schedule.
    6. COMMENTARY ON CLAUSES

    Introductory

    Clause 1: Limited liability partnerships

    This clause provides for the formation of limited liability partnerships.

    Subsections (1) to (3) provide for a new form of legal entity to be known as a limited liability partnership. It will be a body corporate, formed on incorporation (see clause 3). It will have unlimited capacity and will, therefore, be able to undertake the full range of business activities which a partnership can undertake.

    Subsection (4) specifies that while in law an LLP will be separate from its members, its members may be liable to contribute to its assets if it is wound up. The extent of that potential liability is set out in the regulations.

    Subsection (5) states that, except as otherwise provided, the law relating to partnerships will not apply to LLPs.

    Incorporation

    Clause 2: Incorporation document etc

    Clause 2 sets out the procedures for incorporating an LLP.

    Subsection (1) specifies that to form an LLP, there must at the outset be at least two people who are associated for the carrying on of a lawful business with a view to profit and who subscribe their names to a document called an "incorporation document". The incorporation document must be delivered to the registrar. A statement must also be delivered to the registrar that there has been compliance with the requirement that at least two persons, associated for the purpose of carrying on a lawful business with a view to profit, have subscribed their names to the incorporation document. The statement must be made by a subscriber to the incorporation document or by a solicitor engaged in the formation of the LLP.

    Subsection (2) stipulates that the incorporation document must contain various items of information: the name of the LLP, the address of the registered office, the name and the address of persons who are to be members on incorporation and whether all or some of the members are to be designated members.

    Subsection (3) stipulates that an offence is committed if a person makes a statement under subsection (1)(c) that he knows to be false or does not believe to be true.

    Subsection (4) stipulates that where a person is guilty of an offence under subsection (3) that person will be liable on summary conviction to imprisonment for no longer than six months or a fine that does not exceed the current statutory maximum or both. If the conviction is on indictment that person will be liable to imprisonment for a period of not more than two years or a fine or both.

    Clause 3: Incorporation by registration

    This clause provides for the registration of LLPs by the registrar of companies.

    Subsection (1) provides that when the registrar receives the incorporation document he will retain and register it. Once the documents have been registered, the registrar will issue a certificate that the LLP is incorporated by the name specified in the incorporation document.

    Subsection (2) stipulates that a statement delivered under clause 2(1)(c) may be accepted by the registrar as sufficient evidence that the requirement in clause 2(1)(a) has been complied with.

    Subsection (4) states that the certificate issued by the registrar is conclusive evidence that all requirements in clause 2 have been complied with.

    Membership

    Clause 4: Members

    This clause deals with the membership of a limited liability partnership.

    Subsection (1) states that the first members of an LLP are those who signed the incorporation document.

    Subsection (2) specifies that after incorporation, any other person may become a member of an LLP by agreement with existing members.

    Subsection (3) stipulates that a person may cease to be a member by death, dissolution and in accordance with any agreement with the other members of the LLP. Where there is no agreement a member may cease to be a member by giving reasonable notice to the other members.

    Subsection (4) explains that a member of an LLP will not be regarded as an employee of the entity, unless, if he and the other members were partners in partnership, he would be regarded as an employee.

    Clause 5: Relationship of members etc

    The intention is that a limited liability partnership should have the internal flexibility of a partnership, with the members able to enter into agreements about their mutual rights and duties. This clause makes provision regarding such agreements.

    Subsection (1) deals with the relationship between members. The rights and duties of the members of an LLP to one another and to the LLP are governed by the provisions of any agreement between the members, subject to the provisions of any legislation. The proposed LLP legislation will not require an agreement to be entered into between members although there will be clear advantages in an LLP having a formal written agreement. Where an agreement is entered into there will be no requirement to publish it. In the case where there is no agreement on any matter the mutual rights and duties of the LLP and its members will be governed by default regulations. These will make provision concerning various matters including the entitlement of members to share equally in the capital and profits of the business and that every member may take part in the management of the LLP.

    Subsection (2) provides that when an LLP comes into being it will be bound by the terms of any agreement that is entered into by the subscribers to the incorporation document.

    Clause 6: Members as agents

    This clause is about the extent to which an LLP is bound by the actions of its members.

    Any business that a member carries out after ceasing to be a member will still bind the LLP unless either the other party had been told that he was no longer a member or notice that he was no longer a member had been delivered to the Registrar of Companies.

    Subsection (1) provides that each member of an LLP will be an agent of the LLP. Therefore, they may represent and act on behalf of the LLP in all its business (subject to subsection (2)).

    Subsection (2) stipulates that an LLP will not be bound by the actions of a member where that member has no authority to act for the LLP, and the person dealing with the member is aware of this or does not know or believe that the member was in fact a member of the LLP.

    Subsection (3) states that transactions with a person who is no longer a member of an LLP will still be valid transactions with the LLP, unless the other party has been told that the person is no longer a member, or the registrar has received a notice to that effect.

    Subsection (4) ensures that where a member of an LLP is liable to a person (other than another member of the LLP) for a wrongful act or omission in the course of business of the LLP or with its authority, the LLP will be liable to the same extent as the member.

    Clause 7: Ex-members

    This clause concerns the situation where a person ceases to be a member of an LLP, or his interest in the LLP is transferred to another person. A former member, the member's personal representatives, the member's trustee in bankruptcy or liquidator or the trustees under the trust deed for the benefit of his creditors or assignee may not interfere with the management or administration of the LLP, but may receive any amount from it to which they are entitled.

    Clause 8: Designated members

    The role of designated members is to perform a number of administrative functions on behalf of the LLP. However, some provisions of legislation in relation to companies and insolvency, which may be applied by regulations under the Bill, will place on designated members tasks which go beyond the merely administrative, for example, the approval and signing of the LLP's accounts. In performing these tasks, designated members would be representing all the members of the LLP.

    Subsection (1) provides that, where the incorporation document specifies that certain members are to be designated members, then they will be the designated members on incorporation. Other members may become designated members by agreement with the members. A member may cease to be a designated member by agreement with the other members.

    Subsection (2) requires there to be at least two designated members and provides that if no members or only one are designated then all members will be regarded as designated members.

    Subsection (3) provides that if the incorporation document states that every person who is a member of the LLP is a designated member then all persons who are from time to time members will be regarded as designated members.

    Subsection (4) permits the LLP to notify the Registrar that all members of the LLP are designated members or that specified members will be designated. Where the LLP notifies the registrar the effect will be as though it had been stated in the incorporation document.

    Subsection (6) provides that when a person ceases to become a member of the LLP he will also cease to be a designated member.

    Clause 9: Registration of membership changes

    This clause requires an LLP to notify the registrar of companies about changes to its membership.

    Subsection (1) provides that where a person becomes or ceases to be a member or a designated member the registrar must be notified within 14 days and that a change in the name or address of a member must be notified within 28 days.

    Subsection (2) states that where all the members of an LLP are designated members notification only needs to be given that a person has ceased to be a member and there needs to be no separate notification that they have ceased to be a designated member.

    Subsection (4) provides that, where subsection (1) is not complied with, the LLP and all designated members commit an offence.

    Subsection (5) explains that a defence to subsection (4) is available for designated members if they can prove that they took all reasonable steps to ensure that subsection (1) was complied with.

    Subsection (6) explains that where a person is guilty of an offence under subsection (4) they would be liable on summary conviction to a fine.

    Clause 10: Insolvency and winding up

    This clause requires the Department to make regulations regarding the insolvency and winding up of LLPs.

    Subsection (1) states that regulations are required to apply or incorporate, with such modifications as appear appropriate, Parts II to V, VII and VIII of the Insolvency (Northern Ireland) Order 1989.

    The Insolvency Order provides a comprehensive code of procedures relating to both corporate and individual insolvency. This subsection ensures that the major corporate insolvency and winding up procedures including company voluntary arrangements, administration, receivership and voluntary and compulsory winding up, will be applied to LLPs. Such procedures will be adapted as necessary to suit LLPs.

    Subsection (2) allows the Department to make regulations making other provision about the winding up and insolvency of an LLP or an oversea limited liability partnership by applying or incorporating with or without modifications, or disapplying, any law relating to the insolvency or winding up of companies or other corporations.

    Clause 11: Application of company law etc

    Clause 11 allows the Department to make regulations applying or incorporating the law relating to corporations, companies and partnerships (with appropriate modifications) to LLPs.

    Clause 12: Consequential amendments

    This clause allows for statutory provisions, in particular those affecting companies, other corporations or partnerships, to be amended in consequence of the provisions in the Bill or of any regulations which may be made under it.

    Clause 13: General

    This clause makes general provision about regulations under the Bill, and in particular allows regulations to provide that failure to comply with their requirements is a criminal offence. The clause provides that the regulations require the negative resolution procedure.

    Clause 14: Interpretation

    This clause sets out the meaning of certain terms used in the Bill.

    Clause 15: Commencement

    This clause provides for the Department to make an order (or orders) bringing the Bill into operation.

    Clause 16: Short title

    This clause gives the short title of the Bill.

    SCHEDULE - Names and Registered Offices

    Part 1: Names

    The Schedule sets out rules about naming an LLP, and the situation of its registered office.

    Name to indicate status

    The name of an LLP will have to end with "limited liability partnership", "llp" or "LLP".

    Registration of names

    An LLP cannot be registered by a name which has "limited liability partnership", "llp" or "LLP" appearing in it other than at the end. Neither can it have a name that is already used by a registered company or another LLP, nor where the Department considers the use of the name would constitute a criminal offence or the name to be offensive.

    An LLP shall not be registered by a name that is likely to give the impression that it is connected with a Northern Ireland Department or with a local authority.

    Change of name

    An LLP will be able to change its name at any time. However, where an LLP has been registered by a name which, in the opinion of the Department, is misleading or the same or very similar to one already used by a registered company or another LLP, the Department may direct the LLP to change its name.

    Notification of change of name

    When an LLP changes its name it should notify the Registrar. Once the Registrar has received notification, and if the name is satisfactory, a certificate of change of name will be issued and the change will be effective from the date of issue.

    Effect of change of name

    Changing the name of the LLP will not affect any of its rights and obligations, or make any difference to any legal proceedings by or against it.

    Improper use of "limited liability partnership" etc.

    Should a person carry on business using the expression "limited liability partnership" or an imitation of this expression at the end of their name, the person who does so and is not an LLP or an oversea LLP will be guilty of an offence.

    Schedule Part 2: Registered Offices

    Situation of registered office

    An LLP will have to have a registered office at all times and this must be situated in Northern Ireland. Details of the LLP's registered office must be included in the incorporation document.

    Change of registered office

    An LLP can change its registered office by sending notification to the Registrar.

    FINANCIAL EFFECTS OF THE BILL
  6. There are no additional exchequer or staffing implications arising from these proposals.

    7. Before outlining the likely additional costs to business it is important to note that becoming an LLP would be avoluntarydecision that would only be taken if the benefits outweighed the costs.

    Cost of converting a partnership into an LLP

    The additional costs in "converting" a partnership into an LLP are expected to be proportionate to the size and complexity of the firm. Legal requirements should be similar to those for a company. This means that LLPs will have to send annual returns, a list of members, an annual report and accounts to the Registry of Companies, Credit Unions and Industrial & Provident Societies.

    The cost of submitting annual returns and a list of members to the Registry is expected to be minimal - approximately £20. The cost of preparing an annual report and accounts is likely to vary according to the size of the firm. A number of the large professional partnerships already produce and publish their annual reports and accounts for distribution amongst partners as a matter of good business practice. However, it is not clear whether these accounts would satisfy the requirements of an LLP. So there may be some small additional costs incurred by such firms. It is difficult to place an exact figure on the costs of producing annual audited accounts which would meet the requirements of LLP status as the costs will vary from firm to firm.

    It is estimated that, for a medium-size firm with an annual turnover of £13 million, the cost would be £8,500 (production of annual accounts £4,000 and audit £4,500). There would also be other costs associated with converting to LLP status which would include the legal expenses incurred in drawing up the members' agreement and review of any existing internal or third party agreements, such as leases. Once again these costs will be dependent upon the size and internal arrangements of the firms involved, and are very difficult to quantify.

    Cost of incorporating a start-up LLP

    The start-up costs of becoming an LLP for a medium size firm would be, arguably, £8,670 (incorporation of an off the shelf LLP £150, annual return £20, costs of annual report and annual accounts £8,500). In addition there would be recurring costs of £8,520 a year for each firm. The additional legal costs involved in start-up have proved impossible to quantify. If there is sufficient demand for LLPs, then company formation agents are likely to extend their services to LLPs.

    Total compliance costs

    Estimates of eventual take up of the LLP vehicle within the UK are put at 55,000 which would mean a self-imposed annual cost of £0 to £468,600,000 (£8520 x 55,000 firms). The DETI's best estimate is that around 15% (2000) firms in Northern Ireland would eventually choose to become LLPs. This can be little more than an impression at this stage. It would mean a self-imposed annual cost of £0-£17,040,000 (£8520 x 2000 firms).

    HUMAN RIGHTS ISSUES
  7. The provisions of the Bill are considered to be compatible with the terms of the Human Rights Act 1998.
    8. EQUALITY IMPACT ASSESSMENT
  8. Given the technical nature of this piece of legislation, the proposals are considered to have no adverse impact on any of the groups listed in section 75 of the Northern Ireland Act 1998. A full Equality Impact Assessment will be carried out as part of an overall assessment of the Companies Registry policies and services.
    9. SUMMARY OF THE REGULATORY APPRAISAL
  9. A Regulatory Impact Assessment (copies available from Companies Registry) concluded that, while it is difficult to quantify and value the costs and benefits associated with incorporation as an LLP, the costs to firms making this choice are likely to be outweighed by the benefits. Becoming an LLP would be purely a voluntary decision that would only be taken if the benefits outweigh the costs. It provides a practical way to organise that allows the partnership structure to be retained, whilst protecting the personal assets of a partner against claims for which they have no personal responsibility.
  10. In some areas the LLP will have greater flexibility than a company - for example in deciding the internal relationship between members, and in other areas the LLP will have greater regulation than a partnership - for example on winding up where the fact of limited liability requires greater control.
    11. SECRETARY OF STATE'S CONSENT
  11. The Bill creates new offences, the creation of which is a reserved matter under paragraph 9(b) of Schedule 3 to the Northern Ireland Act 1998. It was therefore necessary to obtain the Secretary of State's consent under section 8 of the Northern Ireland Act 1998 to the consideration of the Bill by the Assembly.
    12. LEGISLATIVE COMPETENCE
  12. At Introduction the Minister of Enterprise, Trade and Investment had made the following statement under section 9 of the Northern Ireland Act 1998:

    "In my view the Limited Liability Partnerships Bill would be within the legislative competence of the Northern Ireland Assembly."