Limited Liability Partnerships

Introduction

At present, the only legal vehicle that caters for limited liability in Singapore is the limited liability company under the Companies Act. In several countries, there is an additional vehicle known as the Limited Liability Partnership (LLP).

LLPs are different from another almost similarly named creature usually called the Limited Partnership (LP). In LPs there is usually a general partner who is responsible for all liabilities of the LP with one or more limited partners whose liability is limited to the amount of their contribution. The limited partner does not have any say in the management of the business of the LP.

In October 2002, the Company Legislation and Regulatory Framework Committee (CLRFC) presented a report to the Singapore Government that included recommendations to introduce new business structures to Singapore. Among such new structures are the LPs and the LLPs.

The Limited Liability Partnership

Put simply, the LLP is a corporate body which has a legal personality separate from that of its members and which combines features of both companies and partnerships. It can provide the flexibility of a partnership by allowing its members/partners to adopt whatever form of internal organisation they preferred, whilst limiting the said members’ liability with respect to the LLP to their respective contributions in the LLP itself. Details of LLPs do vary depending on the jurisdictions concerned.

The LLP does not shield individual members from legal liability resulting from their own personal acts which are not done for and on behalf of the LLP. In other words, such members continue to be personally liable for their own negligence and other wrongful acts committed in their personal capacity.

The LLP Distinguished From Limited Liability Company

The LLP should also be distinguished from the Limited Liability Company under the Companies Act. While both have separate legal personality, the shareholder-director (ie. owner-management) divide which is central to the Company does not usually feature in an LLP. The LLP might therefore be preferable to the Company in situations where organisational flexibility is more important than centralised management.

Developments In Other Countries

The LLP is a relatively recent legal creature. The Channel Island of Jersey has enacted an LLP Act in 1997. The United Kingdom enacted its Limited Liability Partnership Act in 2000.

Although it has been widely received in most States in the United States of America, it is still of relatively recent origin. The most widely followed model for LLPs in USA is the US Delaware Revised Uniform Partnership Act (the “Delaware Code”). The CLRFC recommends that this Delaware Code form the basis for Singapore’s legislation on LLPs.

Arguments Favouring LLP In Singapore

The introduction of the LLP as another business vehicle would be consistent with the government’s desired aim of encouraging entrepreneurship, particularly in relation to ‘cutting-edge’ ideas where the need for a large organisation is not important and where the flexibility afforded by the LLP might be ideal. Further, the provision of limited liability encourages bolder experimentation that is tempered by safeguards that will deter the recklessness and abuse of the benefits of incorporation.

There is really no reason in policy or principle why, given the wide acceptability of the limited liability companies in Singapore, a partnership should not also be given body corporate status and conferred the privilege of limited liability, provided that sufficient safeguards are put in place. After all, many people incorporate solely for the reason of limited liability notwithstanding the additional regulatory burden that they have to carry. It should also be noted that with the LLP, this might be the preferred vehicle of business for small and medium sized enterprises compared to incorporating a Company because of its flexibility in management and possibly for tax reasons.

In fact, professional partnerships that desire limited liability will find LLPs very attractive. As the services provided by professional practices become more complex requiring practices to grow in size, concerns over the possibility of unlimited liability will in time become a limiting factor to the growth of that professional practice because of the following concerns:-

  1. a general increase in the incidence of litigation for professional negligence and in the size of claims;
  2. the growth in the size of partnerships;
  3. since in a very large partnership, not all the partners will be personally known to one another;
  4. the increase in specialisation among partners and the coming together of different professionswithin a partnership;
  5. the risk to a partner’s personal assets when a claim exceeds the sum of the assets and insurance cover of the partnership.

The Scope Of Limited Liability

LLP legislation may not give limited liability protection to members in all situations. Different jurisdictions will of course give differing levels of protection. There are at least three broad categories of protection that may be afforded by LLP legislation:

  1. Firstly, liability is limited only with respect to liability for the tortious acts of other members of the LLP.
  2. Secondly, protection is provided against tort claims and all claims resulting from the provision of services, whether arising in tort or in contract.
  3. Thirdly, and this is the position adopted in UK, liability is limited with respect to all situations, ie that limited liability is provided for any debt chargeable to thepartnership, whether arising in tort, contract, or otherwise. The full shield should also protect a partner from liability with respect to acts committed by an employee or agent of the partnership so long as that particular employee or agent is not under that (protected) partner’s direct supervision and control.

Possible Safeguards

The UK Act provides several safeguards; these include:-

  1. The requirement that the LLP utilise appropriate words to advertise its status.
  2. The requirement that the LLP be registered, with its requisite records being kept up-to-date.
  3. The requirement that the LLP render financial disclosure equivalent to that required of companies. It must be noted that the Delaware Code does not require disclosureof financial information. The CLFRC also recommends that no financial disclosure be required.
  4. Provision for members of the LLP to be sued for wrongful and fraudulent trading.
  5. Regulations for dealing with insolvency as well as winding-up of the LLP.
  6. ‘Clawback’ provisions where members of the LLP may be subject to a clawback inasmuch as the liquidator may apply to the court to recover withdrawals of property ofthe LLP made by a member within two years prior to the winding-up when the member concerned knew or had reasonable grounds for believing that the LLP was insolvent or would be made insolvent by the said withdrawal.

Other Considerations

Taxation

The issue of taxation is a factor to consider as to whether the LLP is an appropriate business vehicle. In the Singapore context, there is envisaged that there will be no general tax advantage: the LLP concerned will continue to be taxed as if it were a partnership.

Logistics and Costs

Whether or not the LLP structure is desirable also depends on the projected logistics and costs. This would impact on whether or not there is a requirement of a bond (a pre-requisite in some jurisdictions). The following observations during the Second Reading of the UK Bill are relevant:

“The Bill will probably apply only to large partnerships. The disadvantage for small businesses being limited liability partnerships, compared with being limited liability companies, is that a limited liability partnership is a narrower form of limited liability. I presume that there will be a degree of personal liability to third parties for negligence which, in the main, does not apply to company directors. There is certainly more liability on insolvency resulting from the claw-back provisions mentioned by the Minister under which limited liability partnership members will be ordered to contribute to the assets on insolvency.”

It has, on the other hand, been pointed out that there are relatively fewer problems when a regular partnership is converted into a LLP.

Conclusion

It may also be noted that grave reservations have been expressed about the very concept of limited liability itself, with a possible suggestion (in the absence of limited liability) of insurance being taken out by all firms. However, the principle of limited liability (at least insofar as companies are concerned) is too well-established and any move to eradicate it would militate against the need to promote greater flexibility in the choice of business vehicles.