Months ago, a friend asked me to research about partnerships, especially Limited Liability Partnerships involved in cross border practice. This succinct but educative article will help other inquisitive business enthusiasts to evaluate whether or not this is a viable venture they could explore.
‘Liability’ means responsibility for something. In commercial terms, it is the state of being legally accountable for something. Liability imputes certain responsibilities on the party given authority or privilege to act or handle a transaction on behalf of the giver.
The logic behind liability is that it moves actors to perform as obligated. In partnerships, liability is fundamental in evaluating whether or not partners should act or refrain from acting on behalf of the partnership.
The Partnership Act, 2010
LLP is governed by the Partnership Act, 2010
Under the Act, a partnership is defined as ‘…the relation which subsists between persons carrying on a business in common with a view of profit.’ [Section 2 (1)] It is contractual, expressed or implied between parties. Every trade, business, occupation or profession can form a partnership.
Partners share profits and management expenses of the partnership. They are tasked with ‘carrying on business’ for profits.
In Uganda, a partnership is restricted to 20 persons [section 2 (1)] although a professional partnership may be constituted of a maximum of 50 partners [section 2(2)].
The nature of partners
General Partner: The management of the business is run by the general partner. In the absence of an express, implied intention or agreement, an active partner takes on the duty. [Section 26(e)]
Dormant Partner: This one takes no active role in the management of the partnership. If the dormant partner’s name does not appear on the firm’s business name, the partnership is registered under the Business Names Registration Act, Cap.109 [Section 2 (b)]
The Limited Liability Partnership Law
The Partnership Law dictates that ‘liability’ can be shared, existent upon partners or other actors, thus the ‘Limited Liability Partnership’ principle.
Black’s Law Dictionary defines a ‘Limited Liability Partnership (LLP)’ as ‘a partnership in which a partner is not liable for a negligent act committed by another partner or by an employee not under the partner’s supervision’.
In illustrative terms, if a law firm has two or more partners in its formation (existence), the acts of one partner or his employees cannot be imputed on the other partners or employees directly under their supervision.
What this law offers is the ability to trade as a team in the partnership s well as in individual capacities. It allows members to flexibly perform in the partnership structure without limiting their business ventures provided they do so within the objectives of the partnership.
LLP is limited to 20 partners, one of whom is the general partner who is liable for the debts and obligations of the firm.
LLP must at least have a partner whom the law registers as a limited liability partner, failure to do so; all partners will be regarded as a general partnership and all its members, general partners.
It’s to be registered by the Registrar of Companies.
Intending partners must first reserve a name with the Companies Office. Thereafter, they file to the Registrar a signed statement showing the;
- name of the LLP;
- the general nature of the LLP business;
- the full names and addresses of the partners;
- the principal place of business of the partners;
- the date of commencement;
- a statement that the partnership is limited;
- a description of the status of each partner, limited or general; and,
- The sum contributed by each partner and the form in which it is so contributed.
The applicants must pay a fee for incorporation. After the procedure is complete, the Registrar issues the applicants a Certificate of Registration of the LLP. [Section 50 (2)]
Any changes the LLP experiences, especially those altering its initial position at registration, must be filed at the Registrar’s.
Salient Features of an LLP:
- LLP is a separate legal entity from its partners. It is a ‘body corporate’, meaning it can sue or be sued in its capacity. It can own business, trade in, contract or employ workers in its capacity.
- This does not mean that LLP partners cannot employ personal employees. A partner can acquire services of any person as long as he clearly states that that employee is his and not the partnership’s. Such acts are presumed done by the LLP through its Managing Partner. He is the partnership’s ‘human actor’.
The idea is to have the partnership operate without interference from partners’ personal decisions which may affect its legality.
However, the acts of a partnership will be imputed on the partners as individuals should they hold out to act as the partnership’s representatives.
- LLPs operate in structures formed on-set from an agreement binding the partners. This Agreement defines the objectives, aims, features, members, duration, appointments, legal requirements of the partnership to operate, etc. If signatory partners agree on such terms and others, if any, they are bound by the same.
- The flexibility allows partners to venture into diverse businesses without influence from each other, unless such ventures breach the Partnership Agreement.
For instance, say, a law firm can handle legal matters except for acting as real estate agents. A partner who operates a real estate agency cannot infer legality from the partnership. He is not allowed to operate as if the real estate business is linked to the law firm. His business will be an individual venture which must not interfere with the law firm’s operations. Any party that deals with him does so outside the influence of the law firm.
- LLP has a membership of two or more persons. The maximum is 20 persons. One of the members must be a general partner/manager and at least one must be a limited liability partner.
- The limited liability partner is exempted from actively taking part in the management of the partnership business. His actions cannot bind the firm. (Section 52 (1). However, he can give (7) days’ notice to the general partner to inspect the firm’s books for purposes of evaluating the business.
He is not presumed active in the firm’s management if;
- he consults with and advises the general partner with respect to the business;
- he acts as a surety for the LLP;
- He acts as a contractor for or agent, or employee of the LLP. [See section 52 (3)].
- Limited Liability Partner can assign his contribution in the partnership to an assignee who assumes the latter’s position in the partnership. This is done with consent from the general partner(s).
- LLP cannot be dissolved on the ground that a limited liability partner is mentally incapacitated or bankrupt.
- A general partner can be introduced as a limited liability partner without consent from existing limited liability partners. [Section 52 (7)(d)]
- A limited liability partner cannot dissolve his partnership by notice.
Winding Up of the LLP:
LLP can be wound up if:
- The partnership is dissolved or has ceased to carry on business, or carries on business only for purposes of winding up its affairs.
- The partnership is unable to pay its debts;
- The partnership should be wound up.
Question 1: Can LLP convert to a general partnership?
The partners can surrender the certificate of its registration to the Registrar for cancellation. The Registrar publishes the conversion in the Gazette with 14 days after surrendering the certificate. [Section 56 (2)]
A limited liability partner who becomes a general partner after the conversion will remain liable for any obligation the LLP incurs. He becomes liable for any obligation of the general partnership that the general partner incurs after conversion.
Question 2: Can a general partnership convert to LLP?
If the general partnership delivers the documents mentioned above, it may convert to LLP.
The general partner who becomes a limited liability partner continues to be liable for any obligations the general partner had before conversion.
NB: If there is a pending suit involving a general partnership or limited liability partnership, the suit will not be affected by the conversion.
Limited liability partnerships are a section of partnerships. As earlier discussed, they are actual partnerships; some from general partnerships while others formulated as limited liability partnerships from on-set. However, they may have different procedural intricacies depending on the parties’ interests in the venture.
Given that limited liability partnerships, like general partnerships, are formed with intent to make profits, their structures are the partners’ decisions to make.
To the ordinary reader, the legal position of partnerships (also LLP) is not as complex as the companies’. This does not mean that persons intending to form a partnership will not experience some challenges when registering, maintaining and dissolving a partnership under the Laws of Uganda. For specific accounts of how a partnership is governed, see the Partnership Act, 2010 or seek the services of a commercial lawyer.
BY ATUHAIRWE AGRACE
This article appears in our digital law newsletter, The Deuteronomy Vol 3, Issue 4 of March 24th 2017
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