Partnership / Limited Partnership / LLP Agreement

A. LLP v Limited Partnership v General Partnership

General partnership – liability is unlimited and each JV party is liable for the whole of the liabilities of the venture (although JV parties can themselves be corporate entities). Any change to the identity of the partners will entail a new partnership arrangement which can be an expensive and time-consuming process. The advantage is that sensitive details of the venture can remain completely private between the JV parties.

Limited partnership – the general partner manages the JV and has unlimited liability. Limited partners have limited liability but must be passive and play no part in the day-to-day management of the company – otherwise, the benefits of limited liability are lost. This is popular as an investment vehicle (where the majority of participants are passive investors) but not suitable for commercial joint ventures as limited partners must not be involved in the management of the venture. The advantage is that sensitive details of the venture can remain completely private between the JV parties.

LLP - Limited liability for LLP members. Increasingly common vehicle for commercial ventures (no longer used solely for professional partnerships).

• When the members agree that the LLP is to be bound under a contract, they will bind the LLP, like directors of a company, and not one another, like partners. Unlike partnerships, there is no joint liability for contractual obligations or "joint and several" liability for wrongs. While members may incur liability to third parties dealing with the LLP for negligence, unlike partners and directors, they shall only do so if they have assumed a personal duty of care and the third party has reasonably relied on that assumption.
  
• LLPs have the advantage that there is no requirement for a "general partner" who is liable without limit for the obligations of the partnership. Neither do the members of an LLP lose their limited liability status if they take part in management?
  
• An LLP is a body corporate with its own separate legal personality, like a company. Therefore an LLP gets around many of the problems commonly associated with partnerships. For example, there is no technical dissolution when members retire, no need to sue those who were members when a debt was incurred, no need to procure releases of retiring members from third-party contracts, and no need to procure novations by incoming partners.
  
• An LLP is not restricted in the types of security it can create and can, therefore, create both fixed and floating charges. A partnership cannot create floating charges. It is potentially difficult to raise external loan finance as it lacks a separate legal identity and does not own assets. 
  

B. LLP v Company

LLP and Company both have limited liability. LLPs also have a number of potential advantages when compared with companies.

• Public filing requirements exist, in particular in relation to accounts, but these are not as extensive as for limited companies. The LLP's internal documents do not have to be filed on a public register, and LLPs, therefore, enjoy greater privacy than companies.
  
• LLPs have the organisational flexibility of partnerships, with no need for a rigid distinction between the board and the shareholders, no need for a share capital, no capital maintenance requirements (unless imposed by the LLP agreement), and almost unlimited freedom to decide between members how the LLP is to be managed, subject to statutory obligations and the requirement for at least two designated members.
  
• The LLP is required to file accounts prepared in accordance with generally accepted accounting principles, putting an LLP on par with a company but making it less private than a partnership.
  
• LLPs are generally taxed transparent.

A disadvantage of using the LLP as a joint venture vehicle is that, as with any new form of entity, there may be some reluctance amongst potential participants to use an LLP because the roles and responsibilities of LLP members are not as familiar as the defined roles of directors and shareholders in limited companies. Limited liability may be undermined in practice by guarantees and security required to support external financing and third-party contracts.

Members are often confused about the difference between General Partnership, Limited Partnership, and Limited Liability Partnership. The following table is a quick reference guide: