The Limited Liability Partnership in East and West

Abstract

Limited liability partnership exist in many countries with varying degrees of deviation from the United Kingdom model. In most countries, the LLP is a tax stream entity designed for professionals with an active role in managing the partnership. Thus, the research paper will establish and analyze the main legal aspects of LLP in the United Kingdom, the United States, and Saudi Arabia. This will assist in establishing the basic rules for registering and operating a business and demonstrate the difference in the different jurisdictions. Moreover, the research paper provides an analysis of the leading legal provisions, which will confirm the creation of LLP in the example of a particular state.

Introduction

It is crucial when starting a business to choose the legal form that will ensure the maximum efficiency of its conduct both from a tax and operational point of view and will allow the owner to ensure sufficient confidentiality if necessary. Thus, LLP is a partnership with the limited liability of all partners, which belongs to the primary legal forms. The significance of this project lies in its purpose to explain the reversal and functioning of limited liability partnerships in the UK, USA, and Saudi Arabia. Thus, the project allows for determining the peculiarities of each state’s legislation in the limited liability partnership field. Therefore, the unique approach is to find and analyze information about limited liability partnerships in these countries. Accordingly, this will enable the audience to choose a jurisdiction to establish a company depending on their needs and the information provided. Hence, it is essential to analyze the critical risk requirements in the United Kingdom, the United States, and Saudi Arabia to incorporate an LLP.

Limited Liability Partnership in the United Kingdom

A limited liability partnership (LLP) is an alternative corporate structure envisaged by UK law. This variant provides the benefits of limited liability as in a company but gives its participants the freedom to organize the internal management as in a traditional partnership. The LLP is a hybrid of a limited liability company and an ordinary partnership and is widely used in international business. Moreover, the LLP is a separate legal entity responsible for its obligations, whereas the partners’ liability is limited to the size of their contributions.¹ Moreover, the principal differences between LLPs and companies are their greater flexibility due to the partnership form of organization and taxation according to the partnership principle of “tax transparency.” In other parameters, LLPs are similar to ordinary private companies. ²It should be noted that LLP has a general legal capacity; they are entitled to carry out lawful business activities aimed at gaining profit.

LLP can enter into contracts in its name, buy, sell and lease property, be a founder of legal entities, act as plaintiff and defendant in court, and hire employees. In practice, the LLP form can be used both for trade activities and for rendering various kinds of professional services, such as legal, accounting, auditing, and others. However, organizations pursuing non-profit and charitable purposes cannot be registered in the LLP form. At the same time, LLP, a relatively new organizational-legal form in English law, has existed since 2000. It should be distinct from general and limited partnerships, which have separate and much older regulations.³ Furthermore, LLP status is regulated by the Limited Liability Partnerships Act 2000, the Companies Act 2006, and the Limited Liability Partnerships Regulations 2009.

LLP Registration

In order to register an LLP, an application for registration on Form LL IN01 needs to be submitted electronically or in hard copy to Companies House, and a registration fee needs to be charged. In particular, you will need to provide the following information: the name of the LLP, where the LLP’s registered office is located, and the LLP’s registered office address. In addition, include information about whether you want a specific LLP member to be a designated member or all members to be authorized members. Another item is for each member, including whether or not the member is an authorized member. Note that an LLP may be registered by two or more persons of any nationality or residency who have joined together to do business together⁴. Moreover, the law does not limit the maximum number of participants.

However, an LLP is required to have at least two partners, each committing to make a specified contribution to the partnership, the amount of which corresponds to that partner’s shareholding in the partnership. The capital is usually expressed in pounds sterling, although other currencies may be used. There are no legal requirements for the minimum amount of the partners’ contribution. LLP participants are not shareholders in the sense of corporate law, and their shares (interest) in the partnership are not shares.

An LLP name cannot repeat an existing one unless the existing name is held by an LLP or a company in the same group as the LLP being registered and has agreed to the use of that title. An LLP name cannot have the endings “Limited,” “LTD,” “PLC,” “company,” “and company,” “& co,” “co uk,” and a number of others. However, the LLP has the right to change its name at any time. Meanwhile, the registered office must have a physical location (address) where various notices and letters will be delivered. ⁵ The address of the registered office should be in the same part of the UK where the LLP is registered. It is not required to carry on business at this address. However, all correspondence arriving at the registered office address must be processed promptly.

After verification of the application and payment of the registration fee, Companies House issues a certificate of incorporation for the LLP, which indicates the name and registration number of the partnership, the date of incorporation, and the part of the United Kingdom where the LLP’s registered office is located. The LLP is also required to maintain, from the date of incorporation, a register of its members and a register of the addresses of its members. Furthermore, the LLP’s register of members must be available for inspection.⁶ In the event of membership changes, the LLP must send the relevant forms to the Companies House within 14 days.

LLP Administration

It is essential to note that LLP has no directors or secretaries. The management responsibilities are divided among the members of the partnership. The authorized members have the same rights and responsibilities as any other members of the LLP. Still, they are additionally responsible for the proper administration of the LLP and its compliance with legal requirements. This includes, in particular, appointing an auditor, signing financial statements on behalf of members and, submitting annual accounts to Companies House, and notifying Companies House of any changes in membership. ⁷Each LLP shall have at least two legally appointed authorized members. If there are fewer than two, each of the members is considered an authorized member.

If agreed upon by other members, an LLP member may, at any time, become an authorized participant. At their discretion, members of the LLP may admit new members to the LLP. In addition, an LLP participant may sell, assign or otherwise dispose of their interest in the partnership, in which case they will cease to be an LLP participant. The partnership may be managed simultaneously by all or certain participants. It is possible to appoint a managing partner from among the LLP members and to authorize others to act on behalf of the LLP by written authority.

Moreover, the way the LLP is governed and the relationship between its members is usually governed by an internal partnership document. This is not a mandatory document and does not have to be filed with Companies House, but it is recommended. The parties are free to determine the content of such an agreement within the statutory limits. ⁸The partnership agreement may contain, among other items, the partnership’s name, the location of the registered office, the LLP’s activities, and procedures for appointing and removing members.

LLP Taxation

It should be mentioned that the corporate tax is applied. As usual partnerships, LLP is characterized by “transparency” for tax purposes: it is not an independent subject of taxation and corporate taxpayer. However, LLP participants are subject to taxation concerning income received by each separately as a result of participation in the partnership. All LLP participants, individuals, and companies must be registered with HMRC and file an annual tax return concerning their income. In addition, any profits or capital gains made by the LLP from sources outside the UK are not subject to UK tax unless the participants in the partnership are UK residents. It is important to note that LLPs whose participants are non-UK residents cannot benefit from the benefits or exemptions of UK double taxation treaties⁹. Furthermore, if the LLP plans to carry out trading activities in the UK or with EU counterparties where the annual turnover will exceed £81,000, a VAT registration with an individual Value Added Tax (VAT) number will be required.

LLP Reporting

LLP have the same disclosure obligations as companies. This includes filing annual financial statements, an annual report, filing a tax return, and notifying of any changes in LLP membership. It is essential to note the necessity of accounting; all LLPs are required to keep books and records, allowing the partners to prepare financial statements in accordance with statutory requirements. In addition, LLPs will maintain accounting records at their registered office or at such other place as the members determine appropriate. Moreover, the annual report, which is a summary of the partnership as of the relevant date, is used for reporting purposes.¹⁰ The LLP annual report must be filed with Companies House no later than 28 days after one year from the date of incorporation. ¹¹ LLP’s designated members are responsible for making sure the annual report is accurate and filed on time. Failure to file the annual report is a misdemeanor, subject to the liability of the LLP and its designated partners. In addition, a partnership that neglects to file an annual report may be removed from the Registry of Companies and dissolved.

Authorized members are responsible for preparing and filing LLP financial statements with Companies House. The first LLP financial statements for a period longer than 12 months are required to be filed no later than 21 months from the date of incorporation of the partnership. If the first financial statements are filed for a period of 12 months or less, the normal filing deadline of 9 months from the reporting reference date applies¹². The failure to file financial statements is a crime. Penalties are provided by law for late filing. There are 3 categories of LLPs for financial reporting purposes: small, medium and large. Any LLP that does not satisfy the small or medium-sized criteria is a large LLP and files full financial statements. Small LLPs can prepare accounts under the special provisions of the Companies Act 2006 applicable to LLPs. This means they are required to make fewer disclosures than medium or large LLPs.

Dissolution of an LLP From the Registry

An LLP ceases due to formal liquidation or struck off the register at Companies House. However, if a member withdraws from the partnership, the LLP continues. If the partners no longer need the LLP to exist, it can be voluntarily removed from the register. A majority of the members of the LLP make an application to disaffiliate voluntarily. If there are only two partners, the application is made on behalf of all partners. In addition, Articles 1004 and 1005 of the Companies Act 2006, as applied to LLPs under the Limited Liability Partnerships Regulations 2009, provide conditions under which an LLP cannot be voluntarily struck out. ¹³Thus an LLP cannot be struck off the register if, at any time during the last three months, such a partnership has been in such circumstances. The LLP was engaged in a trade or other business activities and changed its name.

In addition, an LLP cannot be deregistered if bankruptcy proceedings are or may become pending against it. Deduction proceedings are not a substitute for formal bankruptcy proceedings. If an LLP has been struck off the register, creditors and others still have the right to demand that the partnership be reinstated on the record. An application form LL DS01 needs to be completed to have the LLP removed from the record. Partners applying must send a copy of the application to the remaining LLP members, creditors of the partnership, managers, and managers of the employees’ retirement fund within seven days of filing it with the Registry¹⁴. If the application is executed correctly, Companies House will publish information about the proposed dissolution in the official Newspaper to allow interested parties to object to the discharge. If the Registry finds no reason to object, it will strike the LLP from the register after three months from the date of publication of the notice.

Specific Aspects of Limited Liability Partnership in the USA

Limited liability partnership LLP in the USA is an organization where all partners have limited liability and the right to manage the business. This is fundamentally different from the conditions of the General Partnership, in which all responsibility falls on the shoulders of the General Partner, who makes all decisions. In most cases, LLP registration is particularly attractive for accountants, lawyers, and other professionals. As for the advantages, pass-through taxation is possible, which allows partners to avoid double taxation. In an LLP, one partner is not liable for the misconduct or negligence of another partner.¹⁵ Moreover, under U.S. law, LLP partners may have limited liability similar to that of shareholders of a corporation.

It is important to note that LLP regulation varies significantly from state to state. Thus, some states require one partner to be the “general partner” with unlimited liability. Accordingly, it is necessary to legally certify that this partner is fully liable for debts and lawsuits. In an LLP, the partners have the right to manage the business jointly, and the management is self-organized¹⁶. This also occurs according to the laws of different states; for example, it is possible to hire corporation officers who will be legally responsible for the corporation’s management. Furthermore, in an LLP, profits are distributed among the partners, simplifying the taxation procedure and helping to avoid double taxation.

Formation of LLP

Companies formed in the United States must comply with the requirements established by law. Although, each state has separate laws governing the formation of LLPs. LLP is a popular business entity, but in states such as California, Oregon, and Nevada, it can be used for such areas as architecture, legal activities, and accounting. Thus, it is crucial to choose the company’s name, and it is essential that the name is different from other companies registered in a particular state. Additionally, most states require the inclusion of “LLP” in the company name. The next step is to draft an LLP agreement, although not all states require this as a mandatory element. However, such an agreement helps define the roles and responsibilities of each partner, the share of assets, and liabilities. Moreover, such an agreement must specify how profits are distributed, liability for losses, and withdrawal and addition of partners.

Also, a limited liability partnership certificate should be filed after the creation of the agreement. Drafting an LLP agreement is optional; however, all LLPs are required to file a limited liability partnership certificate. It is essential to note that it is more general than the limited liability company agreement. Therefore, it does not contain instructions on obligations, capital, and distribution of liabilities for losses. The primary purpose of this certificate is to indicate the name and address of the company and the terms and contact information of the partners. Thus, the next step is to obtain permits and licenses under US law. The rules differ depending on the industry, state and locality, so the procedure for submitting documents and their list varies. The last stage is the announcement of the business registration; in some states, in particular in Arizona and New York, it is required to publish in the local newspaper a notice of the LLP formation. ¹⁷The tax regime for LLPs provides that profits and losses are passed on to the partners.

An Example of a Specific State

It is important to note that under Florida law, the liability of LLP partners is limited only concerning the negligence or misconduct of other partners. However, a partner is responsible for the debts or obligations of the partnership. Additionally, LLPs are created based on a charter; a registration form must be completed and filed with the Secretary of State. In Florida, the partners’ roles, responsibilities, debts, and financial contributions must also be specified immediately.¹⁸ Furthermore, Florida law provides requirements for the formation of an LLP in the state, including naming the business based on state law, filing an application with the Florida Division of Corporations, selecting a Florida resident as an agent to receive legal notices, and obtaining an Employer Identification Number (EIN). Additionally, it is crucial that the corporation has at least two partners and files an annual report to maintain the status of an incorporated company.

The Statement of Qualifications (SOQ), which is required to be filed with the Florida Division of Corporations, is essential. The SOQ of an LLP should contain the agent’s name, address, name, and address, a statement that the partners have decided to form an LLP, and the date of formation. The date the business becomes an LLP is if it is a date later than the filing date. It is crucial to mention that under Florida law, the LLP’s name, address, and EIN must be provided in the annual report.¹⁹ Furthermore, the consequence of failing to file an annual report is the revocation of the LLP qualification statement.

Limited Liability Partnership in Saudi Arabia

It is also crucial to consider LLC in Saudi Arabia, a limited liability partnership established under the Companies Act. However, in Saudi Arabia, The Company Act is the leading partnership law that allows for the registration of various legal entities. Limited liability partnerships are among the most common in Saudi Arabia.There are two possible types of LLPs, namely private and public companies. Thus, private companies are the most common due to the simple registration procedure at the Saudi Companies House. It should be noted that the Companies Law was updated in 2015, and according to it, the characteristics of this legal form, such as different legal personality than shareholders and restrictions on the business’s existence affirmed by this form²⁰. Also, it is obligatory to have a local office in Saudi Arabia, to obtain a license if the owner is a foreigner. In addition, the main requirement is the presence of at least one shareholder and one director. Although, if there are more than 20 shareholders, creating a Board of Directors is necessary. Moreover, if the number of shareholders is 3, it is also essential to develop a Supervisory Board, which will control the director’s activities.

Furthermore, the amendments to the legislation allow stating that shareholders are no longer liable for business debts in case of loss of at least 50% of the authorized capital, as before 2018. In addition, in the case of debt collection, the creditor may collect the due amount from net profit. As for the capital, the requirements are set by local legislation. In addition, the establishment procedure provides for different minimum capital requirements, but there are no general rules²¹. For example, in 2022, the capital requirements depend on the specialization of the LLC, and the Saudi Arabian General Investment Authority (SAGIA) may set a minimum capital requirement for companies registered with an industrial license.

It is important to note that foreign investors establishing an LLC in Saudi Arabia must obtain a license from the General Authority of Investment (SAIGA). Thus, they need to submit constituent documents, which include a business plan. Also, it is necessary to apply for a license for foreign capital investment and obtain a Certificate of Registration. The following conditions for opening an LLC are opening a bank account, depositing the authorized capital, registering tax, and applying for the necessary business licenses. ²² In general, creating an LLC takes about two months, in the case of foreign entrepreneurs.

It is essential to consider the rules of company registration in more detail. One of the first procedures to establish an LLC in Saudi Arabia is to obtain a company name from the Ministry of Commerce and Industry. A legal entity is registered by preparing the company’s Charter, which should be submitted to the Ministry of Commerce and Industry for safekeeping. After the Ministry has stamped the company’s Charter, the document should be certified by a public notary²³. It is also essential to open a corporate bank account, which can be used after the legal entity receives a registration certificate. Moreover, other registration requirements relate to obtaining registration with the Ministry of Labor or the Saudi tax authorities.

Conclusion

Thus, LLP is one of the most common organizational forms for establishing companies. At the same time, the UK has a coherent and well-developed legal framework for regulating LLPs. According to the legislation, it is a legal entity in the form of a partnership, which is not subject to corporation tax. Moreover, the minimum number of partners is two, and information about them must be publicly available. A director is not necessary to establish a company, and the participants usually perform these functions.

It is important to note that Limited Liability Partnerships in the United States are governed mainly by state law. For example, in Florida, a minimum of two partners are required to be liable for the partnership, except for liability caused by the negligence of other partners. They also have to register the company, which is required by law in Florida, and file an annual report to maintain the company’s legal registration. Besides, it is necessary to note the peculiarities of LLP in Saudi Arabia; the company itself can be public or private, and local legislation sets different capital requirements. In the Ministry of Commerce and Industry it is necessary to submit documents containing information about the company and to obtain a statute with a seal.

Bibliography

Clarke, C. and Kopczuk, W., “Business Income and Business Taxation in the United States Since the 1950s,” Tax Policy and the Economy, vol.31, no.1, 2017, pp.121-159.

Corwin, L. D. and Ciampi, A. J., Law Firm Partnership Agreements, New York Law, Journal Press, 2022.

Davies, P., Introduction to Company Law, Oxford, Oxford University Press, 2020.

Dine, J. and Koutsias, M., Company Law, London, Bloomsbury Publishing, 2020.

Habbash, M. and Haddad, L., “The Impact of Corporate Social Responsibility on Earnings Management Practices: Evidence from Saudi Arabia,” Social Responsibility Journal, vol.16, no. 8, 2019, pp. 1073-1085.

Kraakman, R., The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, Oxford University Press, 2017.

Lennox, C. S. and Wu, X., “A Review of The Archival Literature on Audit Partners,” Accounting Horizons, vol. 32, no. 2, pp. 1-35.

Footnotes

1. J. Dine and M. Koutsias, Company Law, London, Bloomsbury Publishing, 2020, p. 86.
2. J. Dine and M. Koutsias, Company Law, London, Bloomsbury Publishing, 2020, p.88.
3. P. Davies, Introduction to Company Law, Oxford, Oxford University Press, 2020, p.65.
4. P. Davies, Introduction to Company Law, Oxford, Oxford University Press, 2020, p. 71.
5. C. S. Lennox and X. Wu, “A Review of The Archival Literature on Audit Partners,” Accounting Horizons, vol. 32, no. 2, p. 1.
6. C. S. Lennox and X. Wu, “A Review of The Archival Literature on Audit Partners,” Accounting Horizons, vol. 32, no. 2, p. 7.
7. C. S. Lennox and X. Wu, “A Review of The Archival Literature on Audit Partners,” Accounting Horizons, vol. 32, no. 2, p. 6.
8. C. S. Lennox and X. Wu, “A Review of The Archival Literature on Audit Partners,” Accounting Horizons, vol. 32, no. 2, p. 7.
9. R. Kraakman, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, Oxford University Press, 2017, p. 43.
10. R. Kraakman, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, Oxford University Press, 2017, p. 49.
11. R. Kraakman, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, Oxford University Press, 2017, p. 47.
12. R. Kraakman, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, Oxford University Press, 2017, p. 52.
13. R. Kraakman, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, Oxford University Press, 2017, p. 61.
14. R. Kraakman, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, Oxford University Press, 2017, p. 67.
15. C. Clarke and W. Kopczuk, “Business Income and Business Taxation in the United States Since the 1950s,” Tax Policy and the Economy, vol.31, no.1, 2017, p.121.
16. C. Clarke and W. Kopczuk, “Business Income and Business Taxation in the United States Since the 1950s,” Tax Policy and the Economy, vol.31, no.1, 2017, p.126.
17. C. Clarke and W. Kopczuk, “Business Income and Business Taxation in the United States Since the 1950s,” Tax Policy and the Economy, vol.31, no.1, 2017, p.128.
18. L. D. Corwin and A. J. Ciampi, Law Firm Partnership Agreements, New York Law, Journal Press, 2022, p.43.
19. L. D. Corwin and A. J. Ciampi, Law Firm Partnership Agreements, New York Law, Journal Press, 2022, p. 56.
20. M. Habbash and L. Haddad, “The Impact of Corporate Social Responsibility on Earnings Management Practices: Evidence from Saudi Arabia,” Social Responsibility Journal, vol.16, no. 8, 2019, p. 1073.
21. M. Habbash and L. Haddad, “The Impact of Corporate Social Responsibility on Earnings Management Practices: Evidence from Saudi Arabia,” Social Responsibility Journal, vol.16, no. 8, 2019, p. 1076.
22. M. Habbash and L. Haddad, “The Impact of Corporate Social Responsibility on Earnings Management Practices: Evidence from Saudi Arabia,” Social Responsibility Journal, vol.16, no. 8, 2019, p. 1080.
23. M. Habbash and L. Haddad, “The Impact of Corporate Social Responsibility on Earnings Management Practices: Evidence from Saudi Arabia,” Social Responsibility Journal, vol.16, no. 8, 2019, p. 1085.