Limited Liabilities Partnerships - do they fit the bill?

The Limited Liabilities Partnerships (LLPs) Act will - it is hoped - come into effect in the first few months of next year.

The first time solicitors were offered the chance to limit their liability - through incorporation - few took up the option.

So should law firms consider an LLP? Here are some of the areas to bear in mind when deciding whether an LLP is the right business vehicle.

DisclosureThe law will apply the same disclosure provisions relating to accounts to LLPs as it does to private companies.

This means that audited accounts must be filed at Companies House annually.

In addition, the income of the highest-paid partner in the LLP must be disclosed.

Pros: Accounts for larger firms are increasingly transparent anyway with speculative league tables published annually by journalists.

Cons: Fluctuations in the figure given for the highest-paid partner could vary considerably, leading to speculation that the LLP has not had a good year.

This may in fact be caused by a specific deal between the partnership and that partner.

However, such anomalies could be dealt with in an explanatory note to the accounts.

Another problem with the accounts will be the obligation of the LLP to record contingent and future liabilities, including retired partners annuities and rent for unoccupied premises.Firms might want to consider whether disclosure of their accounts may damage them by releasing important information to competitors.

Bank borrowingsBanks will treat LLPs like private companies.

Where they request loans, banks will look at the LLPs accounts; they may demand guarantees from individual partners in respect of borrowings.

Legal identityThe LLP will have a clear legal identity.

This means that where partnerships currently enter leases and other service contracts through special purpose companies, the LLP will appear as the named party to, for example, the lease of the LLP's offices.

Pros: Gives consistency to landlords.

Cons: Again, landlords and others entering service agreements with the LLP may seek separate guarantees from some or all of the individual partners.

International partnershipsThose international firms keen to convert into LLPs should be careful of the ramifications that being an LLP may have within overseas jurisdictions.

For example, firms in mainland Europe need to ensure that becoming an LLP will not have the effect of making partnership profits within that jurisdiction be treated as company dividends to the directors.

This may lead to significantly higher tax liabilities.

International partnerships converting into LLPs might also have to clear regulatory hindrances within overseas jurisdictions to enable the LLP branch to practise law.

Former partnersOne of the problems for LLPs will be posed by former partners whose annuities will appear on the disclosed accounts.

These partners will often also have to give their consent to the partnership becoming an LLP, because of the terms of the existing partnership agreement.

Many partnerships will be reliant on the consent of former partners if they wish to convert.

Tax avoidanceA Parliamentary steering committee is currently examining measures aimed at preventing LLPs from being used as vehicles for tax avoidance.

The LLPs Act should come into force before the committee reports back, but firms contemplating using the LLPs for tax avoidance purposes do so at their own peril.