ACCA/CAT

Question:

In the context of partnership law, focusing particularly on the liability of the members, explain each of the following:

(a)an ordinary partnership;

(b)a limited partnership;

(c)a limited liability partnership.

Answer:

This question requires candidates to explain the operation and potential liability of members of three distinct types of partnerships.

(a)The ordinary partnership

This is the most common form of partnership. Ordinary partnerships involve potential unlimited liability for their members, should the business run into financial difficulties. It is possible to attempt to limit individual liability within the partnership by setting specific limits on the liability of the individual partners. This, however, has no effect on the external liability of the various members of the partnership who will remain liable for the full extent of the partnership debts. As a result, any partner who has to pay more than the amount agreed internally will be in the position to raise an action to recover any amount paid out in addition to their agreed limit from the other members of the partnership.

(b)The limited partnership

The Limited Partnerships Act (LPA) 1907 allows for the formation of limited partnerships. For members of a partnership to gain the benefit of limited liability under this legislation, the following rules apply:

—limited partners are not liable for partnership debts beyond the extent of their capital contribution, but in the ordinarycourse of events they are not permitted to remove their capital;

—at least one of the partners must retain full, that is unlimited, liability for the debts of the partnership;

—a partner with limited liability is not permitted to take part in the management of the business enterprise and cannotusually bind the partnership in any transaction. If a partner acts in contravention of this rule, they will lose the right tolimited liability;

—the partnership must be registered with the Companies Registry.

Very few limited partnerships were ever registered as partnerships could access the advantages available under the LPA 1907, and more, by simply registering their business as a private limited company.

(c)The limited liability partnership

As has already been seen, the main shortcoming with regard to the standard partnership is the lack of limited liability for its members. The Limited Liability Partnerships Act 2000 provided for a new form of business entity, the limited liability partnership (LLP). Although stated to be a partnership, the new form is a corporation, with a distinct legal existence apart from its members. As such it has the ability:

—to hold property in its own right;

—to sue and be sued in its own name.

It has perpetual succession and consequently an alteration in its membership does not have any effect on its existence. Most importantly, however, the new legal entity allows its members to benefit from limited liability as they will not be liable for more than the amount they have agreed to contribute to its capital.

To form a limited liability partnership:

—two or more persons must subscribe to an incorporation document;

—the incorporation document must be delivered to the Companies Registry;

—a statement of compliance must be completed by a solicitor or subscriber to the incorporation document.

The incorporation document must include:

-the address of the registered office;

—the name of the LLP (subject to restrictions);

—the names and addresses of those who will be members on incorporation of the LLP;

—the names of at least two designated members, whose duty it is to ensure that the administrative and filing duties of the

LLP are complied with. If no such members are designated, then all members will be assumed to be designatedmembers.

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