About seven years ago, a new form of business association was introduced in Kenya and that is the Limited Liability Partnership (LLP). Prior to that, Kenya had about six types of business associations that is, sole proprietorships, partnerships, companies, trusts, societies and NGOs.
An LLP can be considered as a loose hybrid of some features of a limited liability company and a partnership as it contains some features of these forms of associations.
A partnership does not have limited liability which means in the event of a debt or other liability arising from the partnership business, then the individual partners are liable for that debt. What’s more, they are liable for any liabilities accruing to the partnership arising from actions of any other partner.
In the event a creditor desires to recover the debt against the business, then he can attach the partners’ personal properties. A company on the other hand has limited liability meaning that in the event a liability is due from the company, then the 3rd party cannot recover such from the individual shareholders or directors.
Companies and their shareholders have separate legal identity meaning that at law, they are treated as two separate persons except in some special circumstances where the corporate veil is lifted. A lot of people prefer to incorporate companies due to this attractive feature that is not accessible to other forms of business associations.
However partners in LLPs have limited liability just similar to a company such that an LLP has a separate legal identity from that of its partners. Therefore partners in an LLP are not personally liable for the debt of the LLP. A further attractive feature is that an LLP has a legal identify and is an artificial person at law.
This means it can sue, contract and even hold property. This feature is not available to sole proprietorships or partnerships as in these forms of business associations, property is held in the name of the business owners. For example if a partnership decided to acquire some property then it means that the property would be held in the names of the individual partners. This may bring complications in the event of a partnership fall out where several partners exit from the partnership. Assuming that the property was held in the name of the partners as co-owners then a partnership fall out may mean that the title deed may have to be changed.
A partnership doesn’t have perpetual succession meaning that in the event of exits, then it may affect the existing partnership. When it comes to an LLP there is perpetual succession meaning that property is held perpetually in the name of the LLP partnerships changes notwithstanding.
An additional attractive feature of an LLP is the fact that body corporates and individuals can form it. This means an individual can partner with a company and form an LLP.
LLPs are more advantageous than sole proprietorships and partnerships due to the above. However they are also attractive when compared to companies as they are easier to form and furthermore the statutory obligations are less compared to companies.
They are also very easy to dissolve when compared to companies. They are therefore very appropriate when it comes to transactional deals. For example if a person wishes to enter into a one off partnership for a specific project an LLP would be ideal. This is perhaps why they are favoured in the world of corporate finance where a lot of hedge funds and private equity funds are registered as LLPs.
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