Choosing the correct business structure is a foundational decision for any enterprise, impacting liability, taxation, and administration. For those seeking a balance between the operational flexibility of a partnership and the protection of a limited liability company, the Limited Liability Partnership (LLP) offers a compelling hybrid structure.
Understanding the Limited Liability Partnership
An LLP is formed by two or more persons with the intent of generating profit. Governed by the Limited Liability Partnership Act of Kenya, an LLP is legally recognized as a body corporate with its own distinct legal personality, separate from its Partners. This status grants the entity perpetual succession.
Principal Characteristics of LLPs
1. Membership Structure
An LLP must be constituted by a minimum of two Partners and at least one Manager. The Partners can be either natural persons or body corporates. However, the Manager must always be a natural person.
2. Separate Legal Entity
The LLP’s distinct legal personality means it operates independently of its Partners. This separation allows the LLP to:
- Own property in its own name.
- Enter into contracts.
- Sue or be sued independently.
This status is crucial as it shields the Partners from personal liability for the business’s debts and obligations. Furthermore, the concept of perpetual existence ensures the business continues operations irrespective of a Partner’s death, retirement, or change in membership.
3. Limited Liability for Partners
A key advantage is the limited liability accorded to the Partners. Partners are not held liable for the overall obligations of the firm, nor are they liable for the obligations or misdeeds of their co-Partners.
However, the LLP itself is liable for a Partner’s wrongful acts or omissions if the Partner was acting within the scope of the LLP’s business or with its authority. In such instances, the liabilities are paid out of the LLP’s property. Importantly, individual Partners remain personally liable for their own wrongful acts or omissions.
4. Taxation Model
The LLP itself is not the unit of taxation. Instead, tax is payable through the individual income of the Partners, aligning with the pass through taxation model common to traditional partnerships.
5. Compliance Requirements
The operational governance of an LLP is primarily detailed in the Limited Liability Partnership deed, which outlines the rights and responsibilities of the Partners. If the Partners fail to create a specific agreement, the entity is governed by the model partnership agreement set out in the Act.
LLPs are mandated to file annual returns with the Registrar within thirty days of their registration anniversary. These returns must include a declaration of solvency, the LLP’s official address, and the details of both the Manager and the Partners.
Formation and Cessation
Registration Procedure
The registration process is conducted online through the designated business registration portal and typically follows these steps:
- Name Submission: Three proposed names are submitted for approval. Confirmation of the chosen name is usually received within twenty four hours.
- Detail Provision: Required details for all Partners and Managers, the nature of the business, and contact information are entered. The statement of particulars is then downloaded, signed by the Partner or Partners, and uploaded back to the system.
- Fee Payment: Upon payment of the requisite fees, the Registrar of Companies may register the LLP and subsequently issue a Certificate of Registration.
Cessation of the LLP
An LLP’s existence may be terminated in one of the following ways:
- By a Court Order.
- Through a resolution passed by the Partners.
- By a strike off initiated by the Registrar due to non-operation.
Cessation as a Partner
An individual’s status as a Partner may cease through:
- Terms stipulated in the limited liability partnership agreement.
- A resignation notice of at least ninety days.
- The death of the Partner.
- The overall dissolution of the partnership.
Upon cessation, the outgoing Partner, their personal representative, or the liquidator is entitled to receive the Partner’s capital contribution to the LLP and their right to a share in the accumulated profits remaining after the deduction of losses as of the date of cessation.
Conclusion
The blend of limited liability, separate legal entity status, operational flexibility, and pass through taxation makes the LLP an attractive option. This structure is particularly well suited for professional services businesses, such as law firms, accounting practices, and consulting firms, which seek to protect their Partners’ personal assets while maintaining control over the entity’s management.
