Limited Liability Partnerships : INTRODUCTION
Partnerships are one of the oldest forms of business. Gradually, however, the general form of a partnership has lost its demand because of the inherent disadvantages associated with it, the primary one being the unlimited liability of partners. Each partner’s assets are at risk in case any liability arises. For a long time, there has been a need for a business format that would combine the flexibility of a partnership and the advantages of a limited liability company at a low compliance cost. This led to the creation of Limited Liability Partnerships, which have gained increasing popularity over the years. Let’s get to understand what they really are.
Definition of a Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is a legal entity formed and registered by two or more persons for the purpose of doing business. Upon registration, the LLP becomes a body corporate with perpetual succession, and with a legal personality separate from its partners. Unlike in general Partnerships, Partners in an LLP sign what is known as an LLP Agreement, which determines their mutual rights and duties, as well as their rights and obligations in the partnership. An interesting feature of this entity is that the partners do not have to be natural persons; an LLP can include a body corporate, such as another company.
Process of Registering a Limited Liability Partnership (LLP)
Partners are required to lodge a statement with the Registrar for the registration of an LLP. The statement must contain the name of the proposed LLP, the general nature of its business, and the proposed registered offices of that entity. It should also include the names, ID numbers and residential addresses of each of the partners. If one of the partners is a body corporate, the document would need to include the name, the place of incorporation (whether the entity is incorporated in Kenya or it is a foreign entity), the registration number or the relevant substitute for it, and the registered offices of the body corporate.
Foreigners can also enter into a limited liability partnership by providing these details, but they will be required to obtain a work permit before starting their operations in Kenya.
The Advantages of Limited Liability Partnerships
- Limitation of the liability of partners
The biggest advantage, no doubt, is the limitation of the liability of the partners, which is limited only to the extent of their contribution to the partnership. Their personal assets are protected. This is because a limited liability partnership is a separate legal entity that is distinct from its partners. It can sue or be sued in its name, and it can own property. Therefore, the LLP is responsible for its own liabilities.
- Management of the partnerships
The flexibility of traditional partnerships was brought into this entity, and thus the partners are at liberty to decide on the management of the LLP. They could decide to have one partner manage all the affairs of the LLP, while the other partners act as financiers, or they could have all the partners actively involved in the management of the LLP. The registered agreement sets out the rights and responsibilities of each partner, as will be agreed upon.
- Lack of double taxation
Another big advantage is that there is no double taxation in an LLP, as partners only pay their individual taxes depending on their income from the Partnership. This helps increase profits and reduce on expenditures incurred.
Disadvantages of Limited Liability Partnerships
- Minimum eligibility of two partners
The only downside to it is that the LLP must have a minimum of two partners. In the event of one of two partners exiting the partnership, the remaining partner would have to look for a replacement, or would have to convert it to a different entity altogether.
Conclusion
It is clear that limited liability partnerships are just the perfect entities for individuals seeking to start out on a business venture, and especially two or more professionals who would like to start offering their services in a structured business-like manner.
Check out our article on How to Start a Business in Kenya
By: Dennis Kachero
If you would like to set up a limited liability partnership and would like more guidance on the process, Contact us at praxcy@mmsadvocates.co.ke or kachero@mmsadvocates.co.ke