Limited Liability Partnership

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= UK legal structure for enterprises, governed by a Member Agreement that can be anything the Members agree, and used by coops

Info via http://files.uniteddiversity.com/Legal_Structures_etc/LLPs.pdf

About the UK's Limited Liability Partnership (LLP)

An LLP is a body corporate and is formed by incorporation. It exists as a legal person distinct from its members. It has the legal capacity to do anything that a natural person can do. It can own UK real estate in its own right; enter into contracts; trade, develop and invest; enter into deeds; sue and be sued; enter into funding and financing agreements and grant security over its assets in its own name. It has rights, liabilities and obligations separate to and independent of its members. The liability of individual members is limited. This is to be contrasted with the liability of partners in general partnership, who are jointly and severally liable for the debts and obligations of the firm and the acts of other partners. The personal assets of a member of an LLP will not be at risk for acts of the LLP or other members. The separate legal personality of the LLP, in law, enables the liability of its members to be limited. The LLP (and not its members) will be liable to third parties.

There is no requirement for a minimum capital commitment from members (which capital would then be available for creditors) or for a guarantee from members of the obligations of the LLP. The extent to which members actually contribute capital therefore becomes a matter of commercial/economic negotiation. It may be that third parties (for example, landlords, lending banks and sellers) will require personal guarantees from members. This, of course, would negate the whole purpose of carrying on an activity via a limited liability vehicle.

One of the principal attractions of an LLP is that it is tax transparent. Each member can (subject to certain restrictions) participate in the LLP in such a way that there is no higher a tax charge than if it had carried out the business itself. This does not mean however that the profits arising from an LLP will be exempt. Profits are taxed as if the business was carried on by the members as partners in partnership. There is no special tax treatment or relief available to LLPs or their members beyond those available to partners in partnership. There are adverse tax consequences for certain sorts of entity which become members of either an "investment LLP" or a "property investment LLP". This prejudices the usefulness of an LLP as vehicles for holding real estate for that type of member.

Use of the LLP Structure to Facilitate P2P Interchange

According to Chris Cook, of the Open Capital Movement, the Limited Liability Partnership creates innovative possibilities for the development of a 'Cooperative Capitalism'.

Background

From Chris Cook:

1.

"Out of the primeval Capital swamp there is emerging a new animal - the "Capital Partnership" - based upon a curious hybrid of a commercial company and a partnership, known as a Limited Liability Partnership (LLP). The LLP is already beginning to make its mark in the commercial world - examples include a recent initiative by the AIM listed company Numerica and a new property portfolio investment scheme by the well known businessman Tom Hunter - but has implications for financing enterprises of all types, in particular those in the field of public investment.

During the early 1990s, professional partnerships such as Arthur Andersen became concerned that their individual partners' acceptance of liability for their firm's actions put them individually at risk of bankruptcy. Long before Enron, the City persuaded Jersey's Parliament to draw up an Act creating the LLP -and the British Government, fearing an exodus of professional partnerships to Jersey, passed the Limited Liability Partnership Act in April 2001. For the first time anywhere in the world, it became possible to form a corporate body -an entity with a legal existence independent of its individual members - which had both collective limited liability and the mutual, co-operative characteristics of partnerships.

There are now over 7,000 LLPs around the country. In part, the growth is because they're so easy to create: two designated members must complete an application downloaded from the Companies House website, and pay £95. There is no Memorandum of Incorporation, no Articles of Association and no Shareholder Agreement. In fact there isn't even any requirement for any written agreement at all - although only the most trusting dispense with them - since simple "default" provisions based upon partnership law apply.

The LLP has two key attributes: firstly it is an "Open" Corporate body (NOT legally a partnership as one would expect from the name) in which any stakeholder, whether or not they are Investors may become Members, thereby aligning their interestswith other members. Secondly, the LLP makes it possible for those who invest Money in an enterprise or in Capital assets such as Land to be members of a "Capital Partnership" alongside the users of the Capital or Capital Asset thereby replacing the usual adversarial contracts between those who finance an enterprise or asset and those who utilise it.

In essence, all these stakeholders are brought inside the partnership, so their interests are aligned; it's quite a change from traditional structures, which pit stakeholders in competition against each other. The LLP delivers an ideal combination of the collective and the individual; it's flexible and easy to establish while its partnership characteristics are robust enough to make it attractive to the private sector." (http://www.opencapital.net/theory.htm)

With this new model:

"All that is necessary is to find investors prepared to share in the revenues generated by productive assets such as schools, hospitals and railways on the basis that they receive an agreed inflation linked rental in respect of the Capital used.

That is the measure of the "Open" form of Capital currently emerging - simply a proportional "share" of revenues for a period of time." (http://www.opencapital.net/theory.htm)

2.

"From 1844 onwards in the UK it has been mandatory for partnerships with more than 20 partners to be incorporated – the result being Corporate Partnerships with unlimited liability. In 1907, it became possible for Partners to limit their partnership individually rather than collectively within a UK partnership at the cost of being unable to participate in the management of the partnership. This model routinely continues in the USA where it is the normal structure for professional partnerships.

In the late 1990's UK professional partnerships, faced with the prospect of individual bankruptcy as a result of litigation against the firm, successfully lobbied for protection, which arrived in the shape of the Limited Liability Partnerships Act 2000 and came into effect on 6 April 2001. Since then over 7,000 UK LLP's have been incorporated, for the most part from conversions of partnerships previously with unlimited liability.

The UK LLP is supremely simple and remarkably flexible. The only requirements are for two "Designated Members" to complete an Application Form obtainable at the Companies House web-site and to return it with the requisite fee of £95. There is no requirement for the mandatory and arcane Victorian vintage Memorandum of Incorporation and Articles of Association – the prescriptive Contracts between Members laid down by Statute – and no need for a supplementary Shareholder Agreement tailoring these Contracts to the precise present day needs of the Members in the relevant Enterprise. All that is needed is a simple ‘Member Agreement’ – a legal protocol which sets out the Aims, Objectives. Principles of Governance, Revenue Sharing, Dispute Resolution, Transparency and any other matters that Members agree should be included. Amazingly enough, this Agreement need not even be in writing, since in the absence of a written agreement Partnership Law is applied by way of default.

While a UK LLP should be a business run "With a View to Profit" the proposed Enterprise Model redefines the relationship between stakeholders in a way that literally removes the very concept of Profit and Loss – a subject to which we will return. The ease of use and total flexibility enables the UK LLP to be utilised in a way never intended – as an ‘Open’ Corporate partnership." (http://www.moq.org/forum/chriscook/ifnotglobal.html)

Example

"The optimal nature of the UK LLP is already becoming apparent, and a number of technology start-ups have utilised the form. Moreover, a transaction entered into in late 2002 by the Hilton Hotel Group serves as an example of how ‘Temporary Equity’ may operate in practice (although it is extremely doubtful that the parties realised quite how ground-breaking their transaction was to be).

The Hilton Hotel Group sold a portfolio of 10 hotels for some £350m to an LLP in which Hilton (the Occupier) hold 40% and the balance of 60% is owned by another LLP linking the 3 Investor Members - one of whom is Bank of Scotland. The Investors receive for 27 years 28.8% of the gross revenues from these hotels plus a further £3m pa all subject to a floor of £17.5m pa or 5%.

There were two conventional routes Hilton Group could have taken to raise Capital from these assets.

  • a loan secured by a mortgage over the hotels;
  • a “sale and leaseback” transaction.

which give rise to an interest and rental overhead respectively and to a divergence of interest between the provider of Capital and the User, ie between the Lender and Borrower or the Freeholder and Leaseholder, respectively. In this transaction, however, the interests of the provider of Capital and the User are aligned, as both have an interest in maximising the overall Value creation of the LLP in terms of revenues. The transaction illustrates a restricted application (due to the Bank’s requirement to limit its “downside” Risk) of what is a generic enterprise form with dramatic implications." (http://www.moq.org/forum/chriscook/ifnotglobal.html)

More Information

  1. Use of a UK LLP for a Cooperative structure
  2. A good information page for start-ups, at http://www.startinbusiness.co.uk/features/ch_260301_llpforms.htm
  3. Open Corporate Partnership
  4. Commons-Based Business Models
  5. Coop-friendly legal structures in the UK, at http://uniteddiversity.com/replicate/legal-structures/
  6. Industrial Provident Societies