Limited Liability Partnerships in the United Kingdom-Do They Have a Role for Small Firms?

By Freedman, Judith | Journal of Corporation Law, Summer 2001 | Go to article overview

Limited Liability Partnerships in the United Kingdom-Do They Have a Role for Small Firms?


Freedman, Judith, Journal of Corporation Law


I. INTRODUCTION

The emergence of a new legal form, the limited liability partnership (LLP), in the United Kingdom, in 2001, may be depicted by some as part of a general, evolutionary movement towards new limited liability vehicles, influenced by such moves in the United States.1 Some are also suggesting that this new legal form, the first such innovation in the United Kingdom for over a century, will provide a more suitable vehicle for small, owner-managed firms than the ordinary limited company.2

This view of the LLP's development and potential will be questioned here. It will be shown that the U.K. LLP resulted entirely from political pressure from professional firms for limited liability in respect to their activities and from their unwillingness to incorporate. Although this new legal form has now been made available to all firms, not just the professions, it has not been designed with small trading businesses in mind, nor in response to small business concerns. The LLP legislation is complex and leaves much uncertainty, for example on the question of liability. It offers possibilities for tax reduction, but as such may distort commercial decisions due to this lack of tax neutrality between different legal forms.

It will be argued that the LLP is an unsuitable vehicle for most small, owner managed, non-professional firms, at least in its present form and state of development. It will be some time, if ever, before it is of value to this type of small firm. Its importance should not be exaggerated.

Prior to work on the LLP commencing, the Law Commission and Department of Trade and Industry (DTI) had both concluded, after consultation, that no new small business vehicle with limited liability was needed,3 The U.K. limited company (the usual form of incorporation in the United Kingdom, used by small and large, private and public firms alike) is already flexible. The tax pressures that resulted in the growth of the LLP and the LLC in the United States, for example, do not apply in the United Kingdom.

The Law Commission was reviewing general partnership law during the time the LLP was under consideration. In addition, a major review of company law was under way (the Company Law Review), which included amongst its tasks a review of the appropriateness and need for simplification of company law for small, private firms. Regrettably, the LLP proposals, consultation, and implementation were conducted by the Department of Trade and Industry on a "fast track" outside either of these other law reform exercises. This fragmented approach to business law reform is not ideal.

In order to provide a framework and reference point for the discussion that follows, Part II of this article briefly examines the needs of small businesses in relation to legal structure and outlines the arguments against the notion that the LLP will be an important new vehicle for ordinary small businesses. Part III then examines the pressures that led to the introduction of the LLP in the United Kingdom, and Part IV evaluates the characteristics of the resulting legal vehicle. It is argued in conclusion, in Part V, that this new legal creature is not the result of an evolutionary and competitive process that has produced an efficient result, but rather is the outcome of a political reaction to pressures which has brought forth a strange legal vehicle of restricted value for small firms.

II. LIMITED LIABILITY, SMALL FIRMS AND LLPS-AN OVERVIEW

A. LLPs--A New Corporate Form Open to All.

The U.K. LLP was proposed initially to meet the perceived needs of professional firms, primarily auditors, who were complaining of unrealistic expectations and "deep pockets" syndrome due to their inability to limit their liability.4 As the legislation was consulted upon and debated, it became clear that it was very difficult to sustain an argument that this new legal form should be limited to certain regulated groups of professionals. …

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