Time flies with great content! Renew in to keep enjoying all our premium content.
Prime
Limited liability partnership best for investor protection
A limited liability partnership involves a business agreement between two or more players.
A friend of mine recently completed registration of the first ever limited liability partnership in Kenya. Businesses will now be able to be formed as LLPs, an option that was never available to Kenyan businesses.
LLPs are partnerships that enjoy unique benefits. They also have several advantages over companies incorporated under the Companies Act. Currently the main business associations in Kenya include sole proprietorships, partnerships, companies, societies, trusts and NGOs. An LLP will be a new kind of business association.
It differs from the ordinary partnerships in that it accords the players a separate legal identity and also gives the arrangement a corporate identity. With ordinary ones, the identity of the partners and that of the business is not separate such that the owners trade and enter into contracts in their names. With LLPs, trading will be done in the business name. The second unique feature of an LLP is that they have a corporate identity meaning that just like companies they will be able to hold property in their own names.
With the ordinary partnership, property is held in the names of the owners jointly. An LLP also accords the partnership a perpetual succession and this means that it will continue to exist despite the exit of old partners. The LLP is also capable of suing in its own name.
This new law is a win for partnerships that wish to convert into LLPs. A challenge that partnerships face is the fact that at law there is no distinction between the business and its owners. However with an LLP a clear distinction is made. Therefore past case law on separation of legal identity between partners and their businesses would most certainly apply in the case of an LLP. The privacy of individual partners is maintained when it comes to making investments and holding property.
Where the property is jointly registered in the names of individuals when one partner exits or another one is admitted, the process of correcting the title is cumbersome. Often this involves numerous filings which are costly and cumbersome. However with an LLP by virtue of the perpetual succession, whether there is a change in the partnership or not, the title of the property remains with the LLP.
It is easier for LLPs to secure borrowing as the guarantees come from the LLP itself and not the individual partners. The law therefore reduces risk for investors.
Corporate identity means that the LLP can enter into contracts as a business without necessarily involving the individual partners. For example, in the event of hiring employees, the contract would be done between the LLP and the staff members and it remains liable to individuals unlike in an ordinary partnership where all transactions are done in the name of the partners.
Another advantage with LLPs, is that they allow for the inclusion of body corporate as partners. This would be quite useful where several businesses wish to form a business consortium for a particular transaction. Then they can form an LLP with each member of the consortium taking up a share as a partner. The complications of joint ventures are avoided with LLPs.
The proposed law provides that LLPS shall be formed by an agreement, with the requirements being two or more persons. The two can be companies, two individuals or a company and an individual which options are not available for ordinary partnerships.
The latter can only be formed by two or more persons. The LLPs also provide for a manager who shall be in charge of operations.
Under the law, existing partnerships or existing companies can apply for conversion under the Act. The benefits of an LLP over a company, is the ease of formation and of dissolving. These make LLPs quite attractive for a specific term transaction.
Most professional bodies require experts to trade either as sole proprietorships or ordinary partnerships.
It is hoped that most professional associations will allow qualifying members to convert into LLPs due to their attractive features and also the ease of operations and management as compared to ordinary partnerships.
It will be easier for such professional businesses to hire staff, secure borrowing and generally administer the business due to the fact that the identity of its owners and the business are separate.
