5.The Act creates a new form of legal entity, the limited liability partnership, which will be a body corporate and exist as a legal person separate from its members. In general, the Act extends to England, Wales and Scotland. Sections 10 - 13 (taxation and class 4 national insurance contributions) and section 19 (commencement etc.) also extend to Northern Ireland.
6.In Great Britain businesses operate in the main as limited companies, sole traders or partnerships. Each of these is subject to different regulatory and tax regimes reflecting their organisation and ownership.
7.The only option for many professions, in the past, was to operate as partnerships, as either statute or the rules of their professional body denied them the ability to incorporate. For example, accountancy firms have only been able to incorporate since 1989. The fact that professional bodies were required to operate as partnerships meant that they were subject to the particular rules relating to the liability of partners.
8.The Partnership Act 1890 sets out special rules relating to the liability of partners to persons dealing with them. First, every partner is liable jointly, and in Scotland severally also, with his other partners for all the debts and obligations of the partnership incurred during his membership. Second, every partner is jointly and severally liable for any loss or damage arising from the wrongful acts or omissions of any of his partners (as well as his own) which were done in the ordinary course of the partnership’s business or with the authority of the partners. When the members are liable jointly and severally for any loss or damage this has the effect that an injured person may sue one or more of the members separately or all of them together at his option.
9.These arrangements were generally appropriate when all partnerships were small and the partners were of the same profession working closely one with another. However, unlimited liability for partners has become an increasing cause for concern in the light of:
a general increase in the incidence of litigation for professional negligence and in the size of claims;
the growth in the size of partnerships (since in a very large partnership not all the partners will be personally known to one another);
the increase in specialisation among partners and the coming together of different professions within a partnership; and
the risk to a partner’s personal assets when a claim exceeds the sum of the assets and insurance cover of the partnership.
Although these concerns arise most acutely in very large professional partnerships they are relevant to partnerships generally.
10.The limited liability partnership goes some way towards addressing these concerns. Its members benefit from limited liability because the LLP is a separate legal person. In general the LLP and not its members will be liable to third parties (but see paragraphs 13-16 below).
11.The idea that there should be the opportunity in Great Britain to organise as an LLP emerged out of a review of the law of joint and several liability. In 1996 the DTI published a feasibility investigation of joint and several liability carried out by the Common Law Team of the Law Commission (HMSO ISBN 0 11 515 452 3). The investigation focused particularly, but not exclusively, on the joint and several liability of professional defendants, seeking to ascertain whether there was an arguable case for replacing joint and several liability by, for example, a system whereby each defendant might be liable for only a proportionate share of the loss. Although the remit did not extend to the question of joint and several liability within partnerships, the DTI took the opportunity to consult on the distinct but related question whether to amend the law in Great Britain to allow limited liability partnerships. This question was asked in the knowledge that the concept of LLPs was well known in some overseas jurisdictions, particularly the USA. Jersey too was working on implementing its own LLP legislation in response to representations from the accountancy profession, with a view to attracting offshore registrations.
12.In February 1997 the Department published a consultation paper “Limited Liability Partnerships: A New Form of Business Association for Professions” (URN 97/597). The response to the paper confirmed that there was a demand for the new vehicle across a wide range of professions, and agreement in principle from those consultees who are potential clients of and providers of capital to LLPs. The paper was followed by the publication of a draft Bill and regulations (URN 98/874) in September 1998. Revised draft regulations were published again for consultation, together with the draft Bill (URN 99/1025) in July 1999. In February 2000 a further consultation document was published concerning regulatory default provisions governing the relationship between members (URN 00/617), and revised regulatory default provisions were published in May 2000 (URN 00/865).