LLPs warned to get right paperwork in place from day one

Graeme Jump, Senior Counsel at Mace & Jones Partnership said “Frighteningly, this decision was only in respect of a trial of a number of preliminary issues, but it still took nine days of High Court time. It seems quite likely that there may be further litigation. Sadly this is yet another case where business people have exposed themselves to litigation costs many more times greater than the legal costs of getting their paperwork right at the outset. I’m talking maybe a hundred times more. This is not an isolated case. I fear there will be more unless the very expensive lessons in this case are taken to heart by the business community. LLPs have become an increasingly popular vehicle for business people. The attraction usually is that the business rather than the partners’ personal wealth is liable for debts if the firm goes bust. In a recession when firms can go under for reasons outside their control converting to an LLP is clearly a wise move. Moreover the cost of doing so is relatively modest. Nevertheless as this case so graphically demonstrates failure to properly draft the legal structure of the LLP can backfire badly.”

Limited Liability Partnerships are a relatively new form of business structure which effectively combines the flexibility of a traditional partnership with the ‘limited liability’ security of a corporation. In an LLP one partner is not responsible or liable for another partner’s misconduct or negligence and partners have a form of limited liability similar to that of shareholders in a corporation. Although the majority of freelance contractors in the UK choose to use Limited Companies it has been known for some to use Limited Liability Partnerships and take all income as self employed earnings.

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