Guide to Jersey limited liability partnerships

Transcription

1 Guide to Jersey limited liability partnerships applebyglobal.com L

2 TABLE OF CONTENTS Preface What is an LLP and why has the introduction of LLPs in Jersey proved so controversial? Characteristics of the Jersey LLP Objections Conclusion... 4 L

3 PREFACE The Limited Liability Partnership (Jersey) Law 1997, which came into force on 9 September 1998, had a stormy passage through the States, Jersey s legislative assembly. The Law was sponsored by two leading firms of UK accountants: Ernst & Young and Price Waterhouse. Registration as a Limited Liability Partnership ( LLP ) was expected to prove particularly attractive to professional firms of accountants, lawyers and others based in the UK, however, there have been two major developments which seem certain to deter many such partnerships from registering as a Jersey LLP. The first of these was the announcement by the Inland Revenue in March 1997 that it will not recognise Jersey LLPs as partnerships but will assess them for tax as corporations. This is notwithstanding the fact that the Law specifically provides that an LLP is not a body corporate. In a second development, the Law Society of England and Wales advised its members in April 1997 that the provisions of the UK Solicitors Act 1974 prevent firms of solicitors practising in England and Wales from registering as a Jersey LLP. Ironically, it is the fact that a Jersey LLP is not a body corporate which gives rise to this prohibition. It is recognised that this Guide will not completely answer detailed questions which clients and their advisers may have. It is intended to provide a sketch of the subject matter covered. The Guide is, therefore, designed as a starting-point for a more detailed and comprehensive discussion of the issues. Appleby St Helier, Jersey August 2005 L

4 1. WHAT IS AN LLP AND WHY HAS THE INTRODUCTION OF LLPS IN JERSEY PROVED SO CONTROVERSIAL? Whereas a company is a legal person distinct from its shareholders whose liability for the company s debts is limited to the amounts they have agreed to pay for their shares in the company, a traditional partnership is not a separate legal person and each of the partners is liable without limit for all the debts of the partnership. If the partnership debts cannot be paid out of the partnership assets, the partners will be required to pay them out of their personal property. In the past many professionals were prevented either by legislation or by the rules of their professional associations from incorporating. That is no longer the case, but most professionals in the UK still continue to practise in partnership. There are a number of reasons for this: tax (a partnership is taxed differently from a company and the process of converting to corporate status is likely to result in an element of double taxation over a period); the desire to keep partnership affairs confidential (a company may be required to make certain financial and other information public whereas a partnership is not); the desire to avoid the conflicts which a change in structure may produce; inertia. The LLP provides the same benefits as incorporation, in that it limits the liability of its partners, without requiring a change of structure. LLPs were first introduced in the US State of Delaware during the 1980s. As a result of the highly litigious environment in the US, they proved immediately popular. Similar legislation has now been enacted in many other US States and the majority of professional firms in the US are now registered as LLPs. Although differences between the US and UK legal systems mean that it is unlikely that the UK will ever become as litigious as the US, it is widely accepted that UK society is becoming more critical and demanding of its professionals and, as the work undertaken by professional firms becomes increasingly international, the risk of being sued in other jurisdictions increases. It is therefore becoming increasingly important that individuals practising in partnership consider methods of limiting their liability. 2. CHARACTERISTICS OF THE JERSEY LLP The main characteristics of the Jersey LLP are as follows: an LLP is a legal person distinct from its partners; an LLP has all the powers of a natural person; there is no limit on the number of partners in an LLP. Partners may be companies, individuals or LLPs. All partners are entitled to participate in the management of the LLP without this affecting their liability; L

5 every LLP must maintain financial provision under which one or more banks or insurance companies in Jersey are required to pay 5 million to the LLP on its insolvent dissolution; provided that the sum of 5 million referred to above is paid to the creditors of an LLP on its dissolution, the partners in the LLP will not be liable for the LLP s debts or losses. If that sum is not paid, the partners will become jointly and severally liable for the debts of the partnership up to the amount of 5 million, even if nonpayment is not attributable to their default. Individual partners will remain personally liable for their own negligence; an LLP will come into existence on the filing of a declaration together with the appropriate registration fee and the issue by the registrar of a certificate of registration of the declaration. The declaration must name all the partners and specify that one or more of them is to be a designated partner. The designated partner(s) must notify changes of the partners to the registrar, make annual declarations naming all the partners and maintain the partnership books and records; an LLP must make annual declarations but there is no obligation to file the partnership agreement or accounts. An LLP s accounts need not be audited; there are no restrictions on an LLP making distributions to its partners, however, a distribution will be repayable if either the LLP is insolvent at the time it is made or the LLP becomes insolvent as a result of a claim which was outstanding at the time the distribution was made or was made within six months thereafter; although LLPs have legal personality, the Jersey tax authorities will treat them as partnerships for tax purposes. Unless the LLP s income arises in Jersey or one or more of its partners is resident in Jersey, no Jersey tax will be payable; an LLP will not be dissolved as a result of the admission of new partners or the retirement of existing partners, unless the terms of the partnership agreement require this, but if the number of partners falls below two or the LLP is declared to be en desastre (i.e. bankrupt) the LLP will be automatically dissolved. The Jersey court will also have power to order the dissolution of an LLP. 3. OBJECTIONS Although it might be objected that the benefit of limited liability should not be made available without giving those dealing with an LLP a measure of protection by requiring information about the LLP s financial affairs to be made available to the public, there seems little else in the concept of an LLP, which when compared with the concept of a limited liability company, would give cause for concern. This view is supported by the fact that the present UK government plans to introduce LLPs in the UK by legislation based on Jersey s Law. The controversy surrounding the Jersey LLP arose mainly from claims that the Law was fast-tracked through the States at the expense of social legislation which should have been given priority, that a senior Member of the States had failed to disclose an interest in the legislation (a charge from which the Member concerned was subsequently exonerated) L

6 and that the aims of those sponsoring the Law was to apply pressure so as to procure the introduction of similar legislation in the UK. 4. CONCLUSION In view of the developments referred to above, it seems unlikely that the Jersey LLP will prove popular as a vehicle for professional partnerships which have no connection with Jersey. For partnerships based in Jersey, however, the LLP would appear an attractive alternative to incorporation, perhaps the main drawback being the requirement that LLPs maintain financial provision of 5 million. L

7 For more specific advice on the information covered in this guide, we invite you to contact one of the following in the Corporate & Commercial Practice Group: Mark Lewis Local Practice Group Head: Corporate & Commercial Simon Howard Local Team Leader: Funds & Investment Services Wendy Benjamin Local Team Leader: Banking & Asset Finance Telecommunications, Technology & Intellectual Property Andrew Weaver Local Team Leader: Segregated Accounts/Portfolio Companies Appleby is one of the largest and most well respected offshore-based legal, fiduciary and administration service providers. With over 600 lawyers and staff, the organisation is uniquely positioned in the key offshore jurisdictions of Bermuda, the British Virgin Islands, the Cayman Islands, Jersey and Mauritius as well as the financial centres of London and Hong Kong. The group provides sophisticated, specialised services primarily in the areas of: Corporate and Commercial, Litigation and Insolvency, Trusts and Property. Complementing our legal expertise are our service companies, Appleby Corporate Services, Appleby Trust and Reid Management. Appleby's associated service companies provide clients with a range of supplementary services: Appleby Corporate Services provides corporate administration services to thousands of companies that have their registered offices in the offshore jurisdictions in which we are located. Appleby Trust consists of licensed trust companies in Bermuda, Cayman Islands,, Jersey and Mauritius offering a comprehensive range of trust services. In Jersey, the group also provides employee benefits trusts, corporate and funds administration services. Appleby Securities (Jersey) Limited acts as a listing sponsor for the Channel Islands Stock Exchange. Reid Management Limited provides professional management, consulting and accounting services and also acts as a listing sponsor for the Bermuda Stock Exchange. Appleby is also a member of TerraLex, an international association of law firms; the World Services Group, a global multi-disciplinary network of service providers; and is represented in many of the major international legal organisations. L

8 This publication is intended only to provide a summary of the subject mattered covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If this guide has been sent to you, and you would like to update your details or be removed from our marketing database, please contact the marketing department at Appleby's or info@appleblyglobal.com. Appleby Trust (Jersey) Limited is regulated by the Jersey Financial Services Commission L

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