LLPs - A Safer Haven?

6 April 2001 was a special date. It saw the coming into force of the Limited Liability Partnerships Act 2000 (the "2000 Act") which created the first new legal entity in over 100 years, the Limited Liability Partnership ("LLP"). The need for this new commercial vehicle arose out of the fear of massive professional claims particularly against accountants in the wake of high profile collapses in the 1990s such as Maxwell and BCCI and which Enron and Worldcom have brought back into the headlines. The LLP was therefore designed to protect the personal assets of partners against potentially catastrophic claims in excess of their insurance cover whether that cover be 1 million or 100 million.

In an insurance market where premiums continue their upward surge, representing multiples of the sums paid only twelve months ago and where the ability to secure insurance at excess levels becomes increasingly difficult, LLPs have taken on greater significance. We look at the reality of LLPs in this context.

The LLP has added to four existing legal structures for carrying on business of which the only two serious alternatives for larger businesses are:-

incorporation as a limited company; and

a traditional partnership under the Partnership Act of 1890.

All of the professions are now permitted to operate as limited companies provided that they maintain adequate professional indemnity insurance but whereas accountants and solicitors have been reluctant to break away from traditional partnership structures a larger proportion of surveyors, architects and engineering practices already operate as limited companies.

The primary advantage of operating as a limited company is, of course, the limitation of liability achieved through a separate legal entity leaving the shareholding participants with no greater financial exposure than the loss of their shareholdings. In practice the protection of limited liability can be eroded by the need for directors to give personal guarantees and the power of the Court occasionally to require directors to make a personal contribution to the assets of their company in liquidation. But the comfort of limited liability is still extremely valuable particularly in respect of the type of one-off claim against which it is impossible to legislate.

By comparison a traditional partnership is not a separate legal entity. The partnership is responsible for the acts of every partner and every partner is individually liable for all of the...