Prior to the enactment of Companies and Allied Matters Act (CAMA) 2020, the old legislation made provisions only for general partnerships. This type of partnership permits individuals to enter into partnership agreements which can be registered under part B of CAMA as a business name. Professionals have long used this vehicle to float their businesses due to ease of formation, tax reduction and organisational flexibility. Despite these benefits, it remains an area of concern that business entities are not separate from the partners. As a result of this partners’ personal assets are unprotected and also they are exposed to liability for the actions of other partners. In addition, partnerships are dissolved upon the death or withdrawal of one of the partners, thereby endangering the business. In 2009, the Lagos State government created the Lagos State Partnership Law allowing for the establishment of Limited Liability Partnerships (LLPs). However, its application is restricted to the shores of Lagos and it was incompatible with CAMA 2004. These ultimately led to the introduction of Limited Liability Partnerships in CAMA 2020.
What is a Limited Liability Partnership (LLP)?
A Limited Liability Partnership is a body corporate with legal personality separate from its members. It is a hybrid business form that infuses two types of business; a partnership and a limited liability company. The formation of an LLP is particularly an appropriate vehicle for accountants, lawyers, doctors, architects and other professional who tend to rely heavily on reputation. This option is suited to a group of professionals with lots of experience and clients between them, as it allows them pool resources together, thereby lowering the cost of doing business while increasing the LLP’s capacity for growth.
Key benefits of Limited Liability Partnership
Limited Liability – The most impactful benefit of an LLP is that the partners enjoy limited liability. That is, in an event where the entity is sued, the liability of its partners would be limited only to the amount contributed by each partner for the formation of the LLP.
Perpetual succession – The life of the LLP is not affected by the demise, retirement, insolvency or withdrawal of any of the partners.
Lessons from other countries
LLPs in the USA
Legislations on LLP are relatively new. In the United States, limited liability partnerships first emerged in 1991, through the passing of a Texas statute. The laws governing the formation of a limited liability partnership vary from state to state. Section 306 of the Revised Uniform Protection Act is the standard statute adopted by most states; this legislation grants a limited liability partnership limited liability protection similar to that of a corporation. In this jurisdiction, LLPs must have at least one managing partner who will claim liability for the partnership’s actions; this partner is therefore legally exposed in the same way owners of ordinary partnerships are. However, silent partners and investors in an LLP possess liability protection if they are not involved in a managerial role.
In the UK, legislation creating LLPs was signed to law in the year 2000. The LLP structure in the UK is commonly used by accountants to retain the tax structure of traditional partnerships whilst adding some limited liability protection. LLPs are also becoming more common among firms in the legal profession such as solicitors although they are permitted to use a limited company structure. The Limited Liability Partnership Act is widely applicable in the UK, unlike Australia where partnerships are governed on a state-by-state basis.
In Queensland, the system can be likened to that of some states in the US, where a limited liability partnership is composed of at least one general partner and one limited partner. It is thus similar to what is called a limited partnership in many countries.
All in all, the legislation in most jurisdictions are similar with minor differences in relation to application and enforcement.
Highlights of CAMA 2020
Following the introduction of LLP laws in USA, UK, Australia and even in Lagos, the legislators saw the need to embrace the provisions for LLP in the CAMA 2020. The highlights of the Act relating to LLP are as indicated below:
- All LLPs must be registered with the Corporate Affairs Commission in a form prescribed by the commission, in order to be given effect under the law.
- After registration the business becomes a legal entity separate from its partners, which may sue and be sued.
- Partners are agents of the LLP and not of the other partners and cannot be liable for the wrongful actions of other partners.
- LLPs must be registered with at least two partners (One of whom must be resident in Nigeria)
- LLPs are regulated by an agreement signed by the all the partners.
- Foreign companies can carry on business as LLPs as long as they register in a manner prescribed by the Act.
The way forward
With the introduction of the new legislation, local and foreign companies are at liberty to use Limited Liability Partnership as a vehicle for running businesses in Nigeria.
If you are interested in starting an LLP or converting your existing partnership into one, kindly contact our team at Nexia Agbo Abel & Co. for guidance.