THE LIMITED LIABILITY PARTNERSHIP ACT, 2011 AND ITS IMPLICATIONS AS AN ALTERNATIVE VEHICLE FOR CONDUCT OF BUSINESS

INTRODUCTION

The Limited Liability Partnership Act, 2011 was assented into law and commenced operation on 16^th March, 2012. The Act repeals Limited Partnerships Act, Cap 30 of the Laws of Kenya, which previously governed the formation, management and regulation of limited partnerships.

IMPLICATIONS OF THE LIMITED LIABILITY PARTNERSHIPS ACT

Registration of an LLP

An LLP may be registered reserving the proposed name. The name is reserved for a period of two months from the date on which the application for reservation was lodged with the registrar.

Thereafter, two or more persons desirous of conducting business for profit [therefore, LLPs cannot be registered with only one proprietor or be used for charitable purposes] under the reserved name may lodge the prescribed form with the registrar. The statement should contain:

1. name of that LLP (which name should not be: prohibited by any law, undesirable, identical to that of any other LLP corporation or business name, or identical to a name that is being reserved under the LLP Act, the Business Names Act or Companies Act); 
2. nature of the proposed business;
3. the proposed registered office;
4. the name, identity document (if any), nationality, and usual place of residence of each person who will be a partner of the partnership;
5. if any of the persons referred to in paragraph (d) is a body corporate:

1.       the body’s corporate name;

2.       the body’s place of incorporation or registration;

3.       the body’s registration number (if any); and

4.       the registered office of the body to which all communications may be addressed;

6.  the name, identity document (if any), nationality and the usual place of residence of each person who will be a manager of the partnership and, if any such person is a body corporate:

1.       the corporate name, place of incorporation or registration number (if any) of the body; and

2.       the registered office of the body to which all communications may be addressed; and

3.       such other information concerning the proposed limited liability partnership as may be prescribed by the regulations.

The name of an LLP must end with the word “LLP” or its long form. The Act also envisages change of name of the LLP as the partners may wish from time to time.

Separate Legal Personality

The Act envisages that an LLP shall be a corporate entity with a legal personality separate and distinct from its owners. The now repealed Cap 30 envisaged partnerships as separate from its owners and therefore, under the former Act, the liability of the firm in the event of insolvency could be settled from personal property of the proprietors. In LLPs registered under the Act, the liabilities of LLP are payable out of the property of the LLP.

Perpetual Succession

A limited liability company also enjoys perpetual succession such that death or departure of a partner doesn’t affect the existence of the firm. This is advantageous especially for professional services firms because a change in the partners of the LLP does not affect the existence, rights or obligations of the LLP.

Powers of an LLP

As an incorporated body corporate, an LLP may in its own name and seal: sue and be sued, and hold and dispose of property.

Power to Form an LLP

Natural persons and body corporates (except trade unions) may form an LLP.

Liability in an LLP

The liability of any partner in an LLP can only arise by contract or tort, and may not arise solely for the reason of one being a partner in an LLP. Accordingly, partners in an LLP will agree on the degree of their liability in respect of any matter.

The Act doesn’t waive liability for tortuous acts arising from individual partner’s action or omission. By extension, one partner in an LLP setup is not liable for wrongful acts/omissions of another partner within the LLP.

However, an LLP would be responsible for a wrongful act or omission committed by a partner to another person (other than a partner of the LLP) in the course of the business of the LLP or with its authority a person.

Agency Relationship between Partners and LLP

Partners of an LLP exercised are agents of an LLP. Such agency is however repudiatable in circumstances where: (a) the partner in question acted without authority of the LLP; or the person dealing with the partner knows that that partner has no authority but proceeds to transacts with such partner.

The Act also obliges LLPs to formally notify the Registrar of any change in partnership of the LLP to avert adverse claims.

Regulation of Partners’ Relation

Under the LLP Act, the relationship of the partners themselves and the relationship between the partners and the LLP are governed by the Limited Liability Partnership Agreement. In the absence of such an agreement, the First Schedule of Act which contains default provisions regarding governance/management of would apply. Decisions of the LLP are to be through resolutions passed with the requisite quorum as may be stipulated in an LLP agreement.  

Cessation from Partnership

Partners in an LLP have three options for exiting the Firm, namely:

a)       In accordance with the provisions of an LLP agreement;

b)       issuances of a 90 days’ notice to the other partners of the LLP of the intention to resign; or

c)       upon death of that partner or on dissolution of the partnership.

Resignation or death terminates all management rights of such a partner.

The Act also protects the interest of resigning partner or his/her beneficiaries (on death). Accordingly, on resignation or upon death, that partner or his personal representatives/assigns is entitled to receive from the LLP an amount:

a)       equal to the person’s capital contribution to the LLP and the person’s right to share in the accumulated profits of the LLP after the deduction of losses of the limited liability partnership; and

b)       determined as at the date the person ceased to be a partner.

LLPs, LLP Partners and Bankruptcy

An LLP Agreement may restrict the application of provision of the Act regarding management of bankruptcy of partners. Generally however, bankruptcy of a partner doesn’t cause such a partner ceasing being a partner in the LLP, although such a partner may not participate in the management of the Firm.

The above notwithstanding, an official receiver or a trustee of the estate of the bankrupt partner is entitled to receive distributions of profits from the LLP that the bankrupt partner is entitled to receive under the LLP agreement.

Assignment Rights

The Act is novel in that a partner in an LLP may, unless otherwise provided under an LLP Agreement, assign his rights to receive distribution from the partnership. Whereas the assignment terminate the assigning partner’s rights in the Firm, it entitles the assignee the right to participate in the management of the Firm. By reason of the assignment, anyone may become a member of the LLP and participating in its management affairs. Accordingly, this is an area that ideally should be well considered when drafting an LLP Agreement. 

There appears to be an inconsistency between section 15 (2) and Section 15 (3) (b), as the former limits  assignee's rights to only receipt of distributions from the partnership which the assignor would otherwise have been entitled to receive, while the the latter entitles an assignee to participate in the management of the partnership. Accordingly, exclusion of right of assignment by way of a LLP Agreement as envisaged under Section 15 (1) will prove critical for most LLPs.

Conversion of Partnerships and Limited Liability Companies to LLPs

The Act is novel in Kenya as it allows conversion of partnerships and limited liability companies to LLPs.  However, such conversion does not terminate rights and obligations which subsisted immediately before the conversion, which rights and obligations are transferred by operation of law to the new LLP.

Requirement for a Manager

An LLP must have a manager who must be a natural person, and whose particulars must be lodged with the registrar in the prescribed form. The role of a manager is to ensure that the LLP lodges annual declaration of solvency or insolvency, file changes in registered office of the LLP and ensure that invoices or other document issued relating to the partnership business bears (a) the name and registration number of the partnership; and (b) a statement that it is registered with limited liability.

CONCLUSION

LLPs have several advantages over other forms of vehicles for conduct of business. LLPs are a cross between a partnership and company structure. They have principally been introduced to afford professional services firms (PSFs) which mostly trade as partnerships (accountants, lawyers, surveyors etc) the opportunity to benefit from limited liability. They provide partners in PSFs with the benefits of limited liability, and accordingly protecting their personal assets from any potential business creditors as is the case with limited liability companies.

While Limited Liability Companies (LLCs) can have multiple members (upto 50), they are not as good at attracting investors as LLPs. This is because, as highlighted above, LLP structure isolates each partner when it comes to claims, for instance, of negligence. In a LLP, unlike an LLC, a claimant may only direct his negligence or malpractice claims toward the negligent partner, and thus protecting the partnership and the other partners.

For tax advantage, LLPs are often used to save on tax obligations and therefor increase shareholder value.  

Accordingly, we expect that a majority of professional service firms will henceforth be registered as LLPs rather than business names under the Registration of Business Names Act (Cap 499 of the Laws of Kenya) or limited liability companies under the Companies Act (Cap 486 of the Laws of Kenya) or converted to LLPs as envisaged under the LLP Act.

We hope the synthesis above suffices your concerns regarding the implications of the Limited Liability Partnerships Act, 2011.

For further enquiries regarding registration of LLPs, preparation of Limited Liability Partnership Agreements, conversion of partnerships of limited liability companies into LLPs or change of LLP names, please contact us at info@stralexgroup.co.ke. You may also reach us on +254 715 310 677.

For: Strategic Legal Solutions Group Limited

Corporate Law & Business Services Consulting - a participating consultancy firm in the SLS Group of consultancies.