LIMITED LIABILITY PARTNERSHIPS

A limited liability partnership (LLP) is now the chosen business structure of most partnerships offering professional services in the UK, having become an option in 2001 with the implementation of the Limited Liability Partnerships Act 2001. This means that most solicitors, accountants, doctors, dentists, architects and vets in the UK have elected to operate their businesses as LLPs rather than as traditional partnerships.

(A) WHAT IS A LIMITED LIABILITY PARTNERSHIP? An LLP is a hybrid of a limited company and a traditional partnership. The most notable similarity between an LLP and a limited company is that both are legal entities, which means that the partners, more accurately known as members, are not liable for the debts and liabilities of the business. However, an LLP does not issue shares, so the members of an LLP are not the same thing as shareholders. Another similarity is that an LLP is required to make its accounts public, as compared to a traditional partnership’s accounts, which are completely private. However, while an LLP is listed at Companies House, the tax responsibilities of the partners are similar to those of a sole trader, as each of them must file their own Self-Assessment Tax Return based on the profits they have received from the business. It is fair to say that LLPs are generally seen as more credible and established businesses than traditional partnerships, largely due to their incorporated status. This is probably because they are subject to more stringent regulations as well as having to disclose certain information on public record. This creates a degree of transparency that is reassuring to lenders and to other businesses.

(B) A DISPUTE BETWEEN MEMBERS In 2009, Sir Michael Briggs, a Justice of the UK Supreme Court, commented that it was a sign of the success of the LLP that “it has yet to give rise to any serious or expensive litigation about how it works”. However, the case of Eaton v Caulfield (2011), provided the first significant development in the law on LLPs. The facts of the case were that Mr Caulfield ran a legal consultancy service, ‘Caulfield Search Limited’. He worked for a while on an ad hoc basis with two others, Mr Eaton and Mr Holloway. After receiving tax advice, the three men agreed to incorporate an LLP, ‘Caulfield Search (Legal) LLP’. The relationship between Caulfield and Eaton deteriorated over time. The relationship broke down completely after Eaton gave a presentation to a firm of solicitors, which Caulfield alleged was substandard. Eaton was then absent from work on what Caulfield believed was the pretext of illness. When Eaton returned to the office, Caulfield summarily expelled him from the LLP. Eaton saw this as a “purported expulsion” rather than a valid one and returned to the office. He found that his swipe card to enter the building had been deactivated, he could not access his emails, and his profile had been removed from the business’s website. He brought a claim against Caulfield, Holloway and the LLP, alleging that he had been unlawfully expelled and had suffered unfair prejudice.

(C) LITIGATION AND JUDGMENT Surprisingly, the three members of the LLP had not drawn up a written agreement and had discussed the terms of working together in very (1) ….. detail. Despite this, Caulfield told the court that he (2) ….. was responsible for management decisions and that Eaton had always understood and accepted this. He therefore believed that he was entitled to expel Eaton in the (3) ….. interests of the LLP. The court found against him and held that Eaton had been unlawfully expelled. A drafted LLP Agreement would have been (4) ….. for Caulfield to have had the (5) ….. of control that he presumed he had. Eaton was therefore successful in his claim for unfair prejudice, with the result that, as there was no (6) ….. agreement concerning the ownership of the LLP, he was entitled to have the LLP wound up and to one third of the capital surplus when that happened.

After Eaton v Caulfield it appeared that Sir Michael Briggs had perhaps been (7) ….. optimistic as it became apparent that many LLPs were operating on the basis of an ‘understanding’ among the members on certain aspects of the business, which was often limited to the costs of running the business and profit sharing. Many had no written agreement in place on crucial matters such as ownership, control or exit. In this situation, as with limited companies, if a dispute arises the (8) ….. provisions set out in legislation will apply and may not result in the outcome that members originally intended.