A Limited Liability Partnership commonly know as LLP is the most appropriate form of business organization for a firm whose primary business is consulting.
The selection of the most advantageous form of legal organization involves weighing many practical and legal considerations. The most important distinctions among the available forms of business include —
- cost and formality of formation and registration,
- transferability of ownership interests,
- continuity of existence,
- management and control,
- ability to obtain capital and credit,
- method of participation in profits,
- personal liability, and
- taxation of the enterprise.
- nature of a limited liability partnership
A Limited Liability Partnership being a body corporate is a legal personality separate from that of its members. As such, it enjoys perpetual succession and the same rights as companies do; that is the right to sue and be sued in its own name, the right to own, hold, develop and dispose of property.
- Formation and registration requirements
A Limited Liability Partnership and in the case of a consulting firm would be formed by sending a statement signed by each person who proposes to be a member/partner of the LLP to the Registrar of companies.
The statement must contain: the name of the partnership, the general nature of the proposed business of the LLP, the proposed registered office, the name, ID, Nationality, usual place of residence of each person who will be a partner in the LLP.
The LLP must also to maintain a registered office in Kenya to which all communication and notices will be addressed.
- management
An LLP is managed by a partnership agreement signed between the partners. It defines the rights and obligations of the partners amongst themselves. It also lays out the rights and obligations or relations between the partners and the partnership. The use of an agreement as the management tool for the LLP provides flexibility that is not available under the Companies Act.
The LLP must have at least one manager who must be a natural person and not a legal person (company) who has attained the age of 18. The manager must be a resident of Kenya.
Decision making is by a majority of the partners and each partner has one vote. Each of the partners of the LLP is entitled to participate in the management of the LLP.
The management agreement is not restricted as to what it can cover. For example the partners can choose to restrict the right of the partners to assign their interest and require that the assignment must be approved by the rest of the partners or that before an assignment is done, the partner intending to assign offers his interest to the rest of the partners.
- membership
The firm must have at least two partners. The Limited Liability Partnership Act does not place a limit on the maximum number of partners that a LLP might register with or have at any one time. A person can only become a partner in a limited liability partnership with the consent of all the existing partners.
- taxation
Taxation is on the individual partner’s income and not on the corporate entity (firm). LLP are not subject to the corporate income tax at 30% which is higher than the personal income tax. Consequently, tax liability of the members depends on whether they are resident in Kenya or non-residents.
- Liability
A limited liability partnership is a body corporate with a legal personality separate from the partners. For this reason the partnership is liable for its debts and obligations to third parties. The limited liability partnership is solely liable on an issue arising out of contract or otherwise. This however does not cover wrongful acts or omissions personal to one of the partners.
The liabilities of the partnership are payable from the assets of the partnership.
- statutory compliance requirements and restrictions
The manager of an LLP must make to the registrar of companies an annual declaration of solvency or insolvency. The declaration must be made within 15 months of registration. Failure to comply with the filing of the declaration of compliance requirement attracts a fine of up to KShs 100,000 and winding up proceedings if the LLP continues to fail to file the declaration of solvency or insolvency.
The firm must keep accounting records sufficient to explain the transactions and financial position of the LLP and enable the preparation of a profit and loss account. It must keep its records for at least 7 years at such place as the partners consider fit. The accounting records must be available for inspection by the partners.
Failure to comply with this provision attracts a fine of up to Kshs 100,000 or imprisonment for not more than 2 year or both.
- continuity of existence
A limited liability partnership enjoys perpetual succession and thus the withdrawal, death, bankruptcy or lunacy of a partner does not dissolve the entity.
This enables the business to continue without interruption even long after the demise of the founding partners.
- transferability of ownership interest
A partner in a limited liability partnership may assign any or the whole of his interest in the partnership. This assignment entitles the assignee to receive distributions from the partnership to the extent that the partner would otherwise have been entitled to receive.
The parameters of this assignment can however be restricted or controlled by the parties although this has to be in a way that does not defeat the intention of the Act.
- raising capital
A limited liability partnership is a body corporate and hence can borrow money in its own name by pledging its assets in order to raise capital to finance its operations. It may also use the capital contributions of its partners in order to raise the necessary capital.
Unlike general partnerships, an LLP can invite investor partners as a way of raising capital without issuing shares to them and giving them a stake in the Partnership like in the case of a company. In this case the investing partner will not take part in management of the LLP if he so wishes.
- Cost
The cost of registering LLPs is higher than that of a Company. One might need atleast 50,000/= to have the whole process done and obtain a certificate of incorporation within a week or two.
Ngugi Mburu is a Commercial and Litigation lawyer with a reputable Law Firm in Nairobi. Email: [email protected] for any enquiries or clarifications.