company law case study

Mr. Smith and Mr. Jones set up their business together as a partnership. Theirs is a highly sensitive professional business and privacy is particularly important to them. They are now considering whether to convert to LLP status. Being able to limit their liability to the capital they have put into the business is an attractive option. But they are also concerned about losing their current tax status and have heard that they will have to publish their annual accounts, which they are reluctant to do. They have a high degree of trust between themselves and so do not have a written partnership agreement.

So should they convert to LLP status?

LLP status would go a long way towards achieving their goal of limited liability. In order to reduce the risk of personal liability for professional negligence, they should also revise their terms of business and review their working practices, ensuring all liability remains with the business itself. However, because the risk of personal liability cannot be entirely eliminated under any type of company vehicle, they should assess the level of their professional indemnity insurance cover and think twice about taking on work that might lead to claims exceeding the amount of cover they have.

Smith and Jones should consider having a written members’ agreement to record at least the key terms of their business relationship, for example profit shares and decision taking. They should also give some thought to the consequences if one of them should cease to want to be involved in the business or become unable to work or even die. The law relating to traditional partnerships has developed over many years and there are rules applicable to most situations. But these rules mostly do not apply to LLPs, which makes it extremely important for LLP members to record the terms of their relationship as comprehensively as possible.

Smith and Jones will need detailed tax advice but, since members of an LLP are taxed in the same way as partners in a traditional partnership, the change to LLP status is likely to be tax neutral. Since their business also owns a freehold property, they can take advantage of an exemption from stamp duty if they transfer the property to the LLP within 12 months of incorporation.

LLPs must normally file annual audited accounts, but Smith and Jones may be able to take advantage of concessions available to ‘small LLPs’ if their business falls below certain thresholds relating to turnover, size of balance sheet and number of employees. In this case they need only file a simplified balance sheet, so their profit and loss account can remain confidential.

Finally, as members of an LLP, Smith and Jones would normally need to file details of their home addresses with the registrar of companies and these may be accessed by the public. There is, however, a provision in the Criminal Justice and Police Act 2001 for the Secretary of State to grant a confidentiality order allowing the home addresses of certain ‘at risk’ persons to remain confidential. If Smith and Jones are concerned about this then we can advise them on whether or not they would be likely to qualify for this protection.