THE CONCEPT OF THE LIMITED

LIABILITY PARTNERSHIP (LLP)

IN CONTRAST WITH OTHER
PARTNERSHIP FORMS

INTRODUCTION

The concept of partnership embodies a relationship that exists between

persons who carry on business in common with the view to making a profit.
Therefore, a partner may be described as a person who enters a partnership
relationship. The basic elements of a partnership are that there is an
association of persons; undertaking a business; which must be carried out
with a view to profit; and it must be carried out by or on behalf of the
alleged partners in common. The concept of partnerships has evolved over
time mainly with the aim of mitigating the liability issues inherent in the
classic partnership form that evolved under common law.

There are three partnership forms envisioned under Kenyan law being the
general or ordinary partnerships; limited partnerships whether foreign or
otherwise; and limited liability partnerships. A general partnership consists
of general partners, each taking part in the management of the firm and
also takes responsibilities for its liabilities. If one partner is sued, all
partners will be held liable. A limited partnership, whether local or foreign,
consists of both general and limited partners. The latter do not participate
in the daily affairs of the business and their liability is limited. Limited
partners are often termed as mere investors who do not participate in the
business other than invest and receive a share of the profits. A limited
liability partnership combines the features of partnerships and corporations.
All partners have limited liability thus partners are neither personally liable
for acts done for the business nor the acts of other partners or employees.
Although a partner may be personally liable for his wrongful acts, other
partners are protected from liability for those acts. Consequently it has
become more preferable because of the limits of liability.

This paper traces the life of a limited liability partnership from its birth to
its death while drawing comparisons with and distinctions from limited and
general partnerships as well as the advantages or otherwise of this form of
partnership in relation to the others. The limited liability partnership is a
creature of the Limited Liability Partnership although its provisions may be
complemented by those of the Partnerships Act so far as the provisions of
the former do not expressly apply.
FORMATION OF A LIMITED LIABILITY PARTNERSHIP

The life of a limited liability partnership begins at registration which may be

done by two or more persons proposing to form a limited liability
partnership lodging the proposal with the Registrar. There are also
provisions for the conversion of either a general partnership or a private
company to a limited liability partnership. The provisions for conversion
especially for companies presents an advantage of LLP’s over companies
because of the ease of formation and dissolving thus making them
particularly useful for particular or specific transactions. Also, an LLP is less
regulated than a private company and in terms of tax benefits, it may be
preferable to a company because currently partnership income is taxed at
the individual partners level and not at the firm level, whereas companies
are taxed at the entity level which is much higher plus any shareholders’
dividends which are also taxed directly. Saving on tax obligations increase
shareholders’ value.

Every person proposing to form a limited liability partnership must sign

statements containing information such as the name of that partnership;
the general nature of the proposed business; the proposed registered office
which must be situate in Kenya; the name, identity document (if any),
nationality, and usual place of residence of each person who will be a
partner and if any of these persons is a body corporate, its corporate name,
place of incorporation or registration, registration number (if any), and the
registered office of the body to which all communications may be
addressed; 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, the corporate name, place of
incorporation or registration number (if any) of the body; and the registered
office of the body to which all communications may be addressed; and such
other information concerning the proposed limited liability partnership as
may be prescribed by the regulations. In relation to the name of the
business, the requirements are that the name must end with the phrase
‘Limited Liability Partnership’ or the abbreviations ‘LLP’ in either upper or
lower case. Also, it should not be prohibited by law; undesirable; identical
to that of any other business name or that which has been reserved in the
LLP, Business Names or Companies Acts. Further, all invoices or other
documents relating to the business must bear the name and registration
number of the partnership and a statement that it is registered with limited
liability.Non-compliance with these requirements regarding names amounts
to offences punishable by fines.

On receiving the statement constituting the proposal, the Registrar, being

satisfied that all the aforementioned requisites have been met is required
to register that statements and issue a certificate of registration to the
persons who lodged them. Such certificate is conclusive evidence that all
statutory requirements have been complied with and that the said business
has been registered by the name specified therein. Suffice to note that the
Registrar may refuse to register a limited liability partnership on various
grounds being that he is not satisfied with the information provided with
regard to an entity; the formal specifications of the statements of proposal
have not been satisfied; that the statutory requirements have not been
met;[17]on certain national security or public interest grounds; or the name
proposed is unsuitable.[19]He must notify the applicants and give reasons
in writing for refusal[20] and the applicant must have an opportunity to give
reasons why the entity should be registered. He further has a right of appeal
to the Minister concerned that is exercisable within thirty days of being
notified of that decision.[21]

Whereas the formation of a LLP is through registration under the Act, the
formation of a general partnership is not clouded in formalities. It only
requires an agreement which could be oral, in writing whether sealed or not
or implied through the parties’ conduct. It only needs that the name is
registered under the Business Names Act. However, the partners may
choose to put their agreement in a formal document called the Partnership
Deed or Agreement or Articles of Partnership setting out the terms and
conditions of the association. It has information on the nature of the
business; each partners’ capital share contribution; profit sharing ratio;
rules for determination of interest on capital; method of calculating
goodwill; the partners’ powers; accounts and audit; expulsion of partners;
and/or arbitration. In its absence, the general rules applicable[22]are that
profit and loss are shared equally, a partner who incurs liability while
discharging the firm’s obligations must be indemnified; a partner who lend
money to the firm is entitled to interest at the rate of 6% per annum; there
can only be a change of business or admission of a new partner with all the
existing partners’ consent; a partner is not entitled to interest on capital
before the ascertainment of profit; every partner is entitled to take part in
the management of the business; the books of account must be accessible
to all parties; and that a partner can only be expelled from a partnership if
the power to do so has expressly been vested in the other partners. Further,
it is prohibited to form a partnership comprising more than twenty
persons[23]but LLP’s are not subject to this restriction thus presents
another advantage of LLP’s.

Limited partnerships are also formed, like LLP’s, through registration under
the Partnerships Act[24]while a person becomes a limited partner upon
registration under the Act.[25]

CAPACITY

In this paper, capacity has been used in two ways. First, it is used to refer
to the capacity of a limited liability partnership in terms of the entitlements
that accrue to the entity upon registration and second, capacity in terms of
who may become partners in a limited liability partnership.
In the first sense, suffice to note that the effect of registration of a limited
liability partnership is that it becomes a body corporate with a legal
personality separate from that of the constituting
partners.[26]Consequently, it acquires all the attendant attributes of a
juristic person such as perpetual succession thus a change in its partners
does not affect its existence, rights or obligations;[27] in its name, can sue
or be sued; acquire, own, hold and develop or dispose of movable and
immovable property; acquire and maintain a common seal that bears its
name and to use the seal for the execution of all documents that by law are
required to be sealed; and do such other acts and things as a body corporate
may lawfully do.[28]A general partnership may also sue or be sued in its
own name; enter into contracts and own or hold property for the purposes
of the business of the partnership; and subject to the partnership
agreement, providing continuity for the partnership business despite a
change in the partners.[29] Further, it has unlimited capacity as a legal
person[30] thus has no capacity to commit offences unless as stipulated by
written law.[31]

This attribute of a separate legal personality presents a LLP’s greatest

advantage over other forms of partnerships in numerous ways. It can
consequently enter contracts in its own name as opposed to general
partnerships where the partners contract in their own names; the business
acquires a corporate identity thus distinct from the partners as opposed to
other partnerships where property, for example, had to be held in the
names of the partners jointly; Also, with regard to holding property, the
title always remains in the LLP regardless of change in partners compared
to general partnerships where the process of changing such title is
cumbersome in the event of change of partners; there are also more
borrowing options available to LLP’s because the firm gives the guarantee
or security thus reducing investor’s risks, compared to general partnerships
where the individual partners act as personal guarantors.

Capacity in the second sense, a natural person or a body corporate may

become a partner in a LLP. However, a trade union, although a body
corporate, is disqualified from being such a partner.[32]In light of these
provisions, it necessarily follows that provisions of the Partnership Act on
who may become partners apply. Therefore, everyone is capable of being a
partner in a firm. Minors may also do so although they cannot be sued for
trade debts and can only be made Bankrupt in respect of debts which are
legally enforceable against them. In the event of partnership between an
adult and an infant, if the partnership owes debts judgment for such debts
will either be against the adult partners alone or preferably against the firm
but excluding the infant partner. In a judgment under any of these forms a
receiving order might be obtained against adult partners and in subsequent
bankruptcy proceedings partnership assets could be given for distribution
to creditors. On attaining the age of majority an infant partner could either
terminate the partnership in order to escape liability or else he will be
equally liable with his adult co-partners. In relation to persons of unsound
mind, if he enters into a contract of partnership and afterwards pleads
insanity, the contract will still be binding even if he proves that he was
insane unless he can also show that the other partner knew or was capable
of knowing him to be insane. Unsoundness of mind therefore is not of itself
a bar to enter into partnership and even the subsequent insanity of a
partner does not automatically dissolve the partnership but it is a ground
for applying to court for dissolution of a partnership. Upon such application
if the court is satisfied that the alleged insane person is actually so, then
the court will grant an injunction restraining him from interfering with the
business.[33]An advantage of the LLP in this regard is that corporate bodies
can become partners as opposed to general partnerships where only natural
persons can be partners. Further, there are varied options of those who can
form LLP’s being either two companies’ or individuals or a company and an
individual. Such options are not available for other forms of partnerships.
Minors can only become members of a limited partnership with the consent
of all the partners.

LIABILITY

A limited liability partnership shall be solely obligated to an issue arising

from either contract or tort and in respect of these, the liability of partners
is limited. Therefore, a person is not personally liable, directly or indirectly,
for an obligation arising from the aforementioned situations only because
the person is a partner of the limited liability partnership. However, this
does not affect the personal liability of a partner in tort for their wrongful
act or omission but if that partner is liable to a person other than another
partner of the partnership as a result of his wrongful act or omission in the
course of the business of the limited liability partnership or with its
authority, the partnership is liable to the same extent as that partner. The
liabilities of a limited liability partnership are payable out of its
property. Further, a partner is not personally liable for the wrongful act or
omission of another partner of the limited liability partnership.[34]

In general partnerships, the liability of the partners is unlimited while for

limited partnerships, the general partners have unlimited liability while
limited partners enjoy limited liability.[35]Therefore, each general partner
is liable for the wrongful acts of another partner in the course of the
business of the firm. A firm is liable for acts committed against third parties
by any of the partners in the cause of the partnership business.[36] Liability
for debts and other contractual obligations is joint while that for torts is both
joint and several. Thus with regard to debts and other contractual
obligations, the plaintiff can bring only one action but in tort he may find
separate actions against each partner. Liability lasts from the time one
becomes a partner until dissolution and winding up of the
business. Consequently a new partner is not liable for old debts and a
retired partner is generally not liable for future debts. These principles may
however be negated by the doctrine of novation which is an arrangement
whereby a new partner agrees to be liable for existing debts or whereby a
retiring partner undertakes to be liable for future debts.[37] Every person
who by words spoken or written or by conduct represents himself or who
knowingly suffers himself to be represented as a partner in a particular firm
is liable as a partner to anyone who has on the faith of such representation
given credit to the firm.[38]

RELATIONS BETWEEN PARTNERS AND THIRD PARTIES

An agency relationship subsists between a partner and a limited liability

partnership. However, the business will not be bound by the acts of a
partner in relation to a third party if either the partner, in fact, has no
authority of the business to act in that way, the third party knows that the
partner has no authority or he does not know or believe that person to be
a partner of the limited liability partnership. Further, a partner who has
ceased being in the business is deemed as still being part of the business
in relation to a third party unless the third party has notice that the
particular partner has ceased to be a partner of the limited liability
partnership or notice of the fact that the partner is no longer part of the
entity has been delivered to the registrar.[39]

An agency relationship subsists between each partner and the firm and
amongst the partners inter se thus every partner is an agent of each other
and the firm. A partner exercises both real and ostensible authority, and
the firm is generally liable for debts arising in the conduct of a partner.
However, for the firm or other partners to be held liable for the acts of a
partner, it must be evident that; the partner was acting in the business of
the firm; he was acting in the usual way; and he was acting in his capacity
as a partner. However, situations may arise where a partner is held
personally liable. For instance, if he is prohibited from acting on behalf of
the firm or signs a document without express authority. A third party who
has contracted with partnership may either sue the partner he dealt with or
all the partners and if a single partner is sued and his assets cannot make
good the firms’ liability, the other partners cannot be sued. Suing all the
partners enables the plaintiff to execute is judgment against all the partners
since they are jointly liable. Unless otherwise agreed, the liabilities of a
former partner cease when he ceases membership while that of a new
member accrue from when he joined the firm.[40]

RELATIONS BETWEEN PARTNERS INTER SE AND WITH THE LLP

The relationship of the partners inter se and that of the partners and the
limited liability partnership are governed by the limited liability partnership
agreement which sets out their respective and mutual rights and
obligations. In the absence of such agreement, default provisions contained
in the First schedule to the Act apply. Decisions of the entity are made
through resolutions passed by a validly constituted quorum as may be
stipulated by the agreement or by all the partners unanimously if no
agreement exists.[41]
In a general partnership, the relationship between partners inter se is
governed by the agreement between them while agency governs that
between the partners and the firm. However, a partnership agreement is a
contract of utmost good faith. Each partner is entitled to utmost fairness
from the co-partners. Therefore, a partner with an interest in a transaction
involving the firm must disclose; secret profits must be accounted for; a
partner mat not compete with the firm; and a partner can only be expelled
from the firm only in good faith.[42]

CESSATION FROM PARTNERSHIP

A partner may exit from a limited liability partnership either by following

the provisions of the limited liability partnership agreement; giving at least
ninety days’ notice of the intention to resign to the other partners; or upon
death of that partner or on dissolution of the partnership. Resignation or
death of a partner extinguishes all his management rights such that his
personal representative or a liquidator cannot interfere with the
management of the partnership. The interests of a resigning or dead partner
are further secured because that partner, his personal representative or
assignee is entitled to receive from the partnership an amount equal to the
partner’s capital contribution to the entity and his right to share in the
accumulated profits of the entity after the deduction of the losses of the
business which is determined as of the date the partner ceased
membership.[43]

A person ceases to be a member of a general partnership if he dies; is

expelled by his partners;[44]the partnership is dissolved; a Court order is
made to remove the partner;[45]a bankruptcy award or an award for
sequestration against the partner is made; or upon resignation[46]after
giving at least three months’ notice of the intention to do so. Partners in a
limited partnership are prohibited from expelling a limited
partner.[47]However, a limited partner ceases to be one when he is
deregistered; dies or the partnership is dissolved.[48]

EFFECT OF BANKRUPTCY OF A PARTNER ON A LIMITED LIABILITY

PARTNERSHIP

The effect of a partner’s bankruptcy may be stipulated by the partnership

agreement and if there is none or its provisions are inadequate in this
regard, the rule is that the bankruptcy of a partner does not cause him to
cease being a part of the entity although he becomes disqualified from
participation in the management of the entity. Although the official receiver
or the trustee in bankruptcy may not interfere with the management of the
entity, he is entitled to receive distributions of profits from the LLP which
the bankrupt partner is entitled to receive. [49]On being declared bankrupt,
a partner ceases to be part of a general partnership.[50]

MANAGEMENT OF THE LIMITED LIABILITY PARTNERSHIP

A limited liability partnership must have at least two partners and one
manager. It is an offence to carry on business as a LLP by one person for
more than two years. That person becomes personally liable, jointly and
severally with the partnership for the obligations of the partnership incurred
during that period if that person was a partner of the business and knew or
ought to have known that the business was being done in that manner.[51]
The manager must be a natural person above eighteen years old. His
particulars must be lodged with the Registrar in the prescribed form
together with that persons’ consent to act in that capacity. His role is to
ensure that the firm lodges annual declaration of solvency or
insolvency;[52] to file changes in the registered office of the firm;[53] and
ensure that the invoices and other documents of the firm bear the name
and registration number of the partnership and also state that it is
registered with limited liability.[54]He is personally liable for all penalties
imposed for failure to discharge his duties unless he can prove that he is
not liable. If the firm fails to appoint a manager as stipulated it commits an
offence punishable by a fine of up to one hundred thousand shillings. This
is the same for failure to lodge the manager’s particulars with the
registrar.[55]If there are more than one managers, any act required to be
done by a manager may be done by any of them. Anything that constitutes
an offence by a manager constitutes an offence by each of them.[56]

Further, a limited liability partnership must keep accounting and other

records to sufficiently explain the transactions and financial position of the
partnership and ensure a profit and loss account and a balance sheet is
prepared from time to time which gives a true and fair view of the state of
affairs of the partnership. A firm must retain its accounting records for not
less than seven years after completion of the matters to which they relate.
The accounting records must be kept safe and remain open to inspection at
all times by the partners. The Registrar may, by notice in writing to the
limited liability partnership or any of its partners, require the partnership or
that partner to produce the partnership’s accounting records for inspection
by him at such time or with such period, and at such place, as is specified
that notice. Failure to comply with these provisions give rise to an offence
which both the partnership and each of the partners are liable on conviction
to a fine, imprisonment or both for a natural person and a fine for a body
corporate.[57]

In both LLP’s and general partnerships, each partner is entitled to

participate in the management of the partnership.[58]However, a limited
partners’ role in a limited partnership is restricted and he cannot take part
in the management of the firm.[59]

ASSIGNMENT OF PARTNERSHIP INTEREST

The partnership agreement may also provide for the assignment of a

partner’s interest. If it does not, a partner may assign the whole or any part
of his interest in the partnership but only to the extent that the assignee
becomes entitled to receive distributions from the partnership that the
assignor would otherwise have been entitled to receive. The effect of an
assignment is termination the partner’s interest in the partnership and
entitles the assignee to participate in the management of the limited liability
partnership.[60] There seems to be an inconsistency within this provision
because one sub-section[61] only entitles the assignee rights to receipt of
distributions from the partnership while another[62]entitles the assignee to
participate in the management of the partnership. My submission is that
preference should be given to the latter provision because an assignee
should be entitled to all the rights and obligations that accrue to an assignor.

In general partnerships, one may assign his interest in the firm and the
assignee becomes entitled to the assignor’s profit share. However, he does
not become a partner unless all other partners have agreed. Therefore, the
assignee can neither participate in the management of the business nor
inspect the partnership’s records.[63]An assignee of a limited partner may
become a partner of the firm if all the general partners agree to the
substitution and if it is done according to the partnership agreement.[64]

DISSOLUTION OF A LIMITED LIABILITY PARTNERSHIP

A partnership may terminate due to the death of a partner or by dissolution

which may be effected through an agreement between the partners or by
an order of the court. By agreement, it may be dissolved at the expiration
of a fixed period if contemplated; upon completion of the specific purpose
it was formed for; by notice of the intention to dissolve to other partners;
or as a result of death or bankruptcy of any of the partners if no agreement
to the contrary exists. An application to the court to dissolve may be made
if partner is adjudged a lunatic or he is shown to the satisfaction of the
court to be of permanently unsound mind; if a partner other than the
applying partner becomes in any way permanently incapable of performing
his part of the partnership contract or has been found guilty of such conduct
as in the opinion of the court is calculated to affect prejudicially the carrying
on of the business; if a partner other than the one applying wilfully or
persistently commits a breach of the partnership agreement or otherwise
conducts himself in matters relating to the partnership business in such a
way that it is not reasonably practicable for the other partners to carry on
business with him; if the business of the partnership can only be carried on
at a loss; or whenever in any case circumstances have arisen which in the
opinion of the court renders it just and equitable that the partnership be
dissolved. On dissolution of a partnership or retirement of a partner any
partner may publicly notify the same and require the others to assist in all
other acts for dissolution. After dissolution the authority of each partner to
bind the partnership and the other right of obligations of a partner continue
as far as necessary to wind up the affairs of the partnership and complete
any transactions which were began but not finished by the time of
dissolution.
The differences in dissolution among the three forms of partnerships relates
to the procedure which are set out in the respective legislation for each form
of partnership.

CONCLUSION

In light of this discourse, it is clear that the LLP is a better form of business
entity compared to other partnership forms. It adds onto the advantages of
partnerships generally its own benefits making it a superior business entity
to the rest suitable for contemporary business relations. It is therefore
advisable that it is adopted by business people to enhance efficiency.