WHY YOU NEED TO REGISTER A LIMITED LIABILITY PARTNERSHIP UNDER THE NEW CAMA 2020

Reasons why you should register a limited liability partnership under the new CAMA 2020.

CHAMAN LAW FIRM

2/12/2022 9 min read

WHY YOU NEED TO REGISTER A LIMITED LIABILITY PARTNERSHIP UNDER THE NEW CAMA 2020

In 2009, the Lagos State Government enacted the Partnership (Amendment) Law of Lagos State ("the Partnership Law"). The Partnership Law, which was only applicable within the territorial confines of Lagos State, made provisions for the creation of Limited Partnerships and Limited Liability Partnerships. However, the enactment of the Companies and Allied Matters Act, 2020 ("CAMA 2020" or "the Act") now provides for the incorporation of Limited Liability Partnerships (LLP) across the country. This is aimed at improving the ease of doing business in Nigeria by ensuring that entrepreneurs are able to form partnerships and also enjoy reduced personal liability.

The scope and nature of business enterprise in Nigeria is now set to experience new dynamism with the creation of Limited Liability Partnerships under the Companies and Allied Matters Act 2020. The introduction of Limited Liability partnerships has given impetus to the general law of Partnerships in Nigeria. The Companies and Allied Matters 1990, which is the precursor to the current Act, was amended in 2020 to provide for Limited Liability Partnerships[1]. The defunct Companies and Allied Matters 1990 made provisions for general partnerships. This type of partnership permits individuals to register partnership as a business name[2].

The need for a more dynamic form of partnerships in Nigeria to address the increase in litigation resulting in personal liability by partners and the consequent threat to partnership entities and their partners has necessitated the introduction of a form of partnership that would provide a limitation of liability analogous to that enjoyed by directors of a limited liability company. This is timely and important especially for individuals and groups providing professional services. In the same vein, the desire to protect investors and keep the trend of Limited Liability Partnerships in growing economies around Nigeria encouraged the federal government to push for the creation of limited liability partnerships as a business entity.

WHAT IS A LIMITED LIABILITY PARTNERSHIPS

Limited Liability Partnership as a body corporate with legal personality separate from its members[3]. It is a hybrid business form that infuses two types of business; a partnership and a limited liability company. The formation of a Limited Liability Partnerships is particularly an appropriate vehicle for accountants, lawyers, doctors, architects and other professionals 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 Limited Liabilty Partnerships capacity for growth.

A Limited Liability Partnership is an alternative corporate vehicle that combines the flexible structure of a partnership with the benefits for its partners or members. A limited liability partnership is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as partnership.

A limited liability partnership is a relatively new entity in Nigeria, the legislation creating it having come into existence in 2020. Some of the key features of limited liability partnerships are:

·         They are a separate legal entity from their members.

·         They have perpetual succession.

·         They have the benefit of limited liability for their members.

·         They have the organisational flexibility of a partnership.

·         Any agreement (“LLP agreement”) between the members governing the operation of the LLP is a private document, which is confidential to the members.

·         They must have at least two “designated” members.

·         Their “trading disclosure” requirements are similar to those of a company.

·         They must be registered at the Corporate Affairs Commission.

·         Their accounting and filing requirements are similar to those of a company.

·         Having LPPs means spreading the risk, leveraging individual skills and expertise, and establishing a division of labour

·         LLPs are common in professional business like law firms, accounting firms, and wealth managers etc.

A SEPARATE LEGAL ENTITY

Limited Liability Partnership have been described as a legal entity separate from its members. On incorporation, the Corporate Affairs Commission will issue a Limited Liability Partnership with a unique registration number, in the same way as a limited company[4]. This registration number will stay the same throughout the lifetime of the Limited Liability Partnership, even if the Limited Liability Partnership changes its name. An LLP itself has unlimited capacity and it can do anything that a natural person or body corporate can do, including suing and being sued, acquiring, owing, holding and developing or disposing property whether movable or immovable, tangible or intangible, entering into contracts, as well as having a common seal[5].

PERPETUAL SUCCESSION

CAMA 2020[6] describes an LLP as a business entity with perpetual succession. Perpetual succession means that any change in the membership or death of any of the Partners of an LLP will not affect its continued existence. However, if the membership of the LLP falls below two Members, and the LLP continues to trade for more than 6 months with just one Member, only that member would be liable for the obligations of the partnership incurred during that period[7].

LIMITED LIABILITY

Section 765 of CAMA 2020 provides that a partner of an LLP is an agent of the LLP, and not of other partners. A partner cannot be liable, directly or indirectly for an obligation carried out in accordance with the partnership agreement. He cannot be liable for the wrongful act or omission of any other partner of the LLP.

The members of an LLP act as its agents and only have liability up to the amount they have contributed to the LLP – in particular their capital contribution and undrawn profits. This is a significant advantage over a traditional partnership where the partners generally have unlimited liability. However, the liability of a member may be extended If the members of an LLP allow the LLP to continue trading after they knew (or ought to have known) that it had no reasonable prospect of avoiding insolvency; or allow it to continue trading with a view to defrauding creditors, they may be personally liable.

DESIGNATED PARTNERS

Section 749 of CAMA 2020 provides that an LLP must have at least two designated partners. The designated partners must have the same rights and duties towards the LLP as any other member but with extra responsibilities. These include duties such as signing and delivering the accounts and annual returns and notifying Corporate Affairs Commission of any changes in membership, registered office address or name.

Designated members are accountable in law for failing to carry out these legal responsibilities. See Section 750(b) of CAMA 2020.

ORGANIZATIONAL FLEXIBILITY

An LLP has the organizational flexibility of a partnership and the provisions dealing with the day-to-day running of the LLP will normally be contained in a written LLP agreement. An LLP agreement will typically deal with matters such as profits and losses, drawings, ownership of property, meetings/decision making, admission of new members, retirement/expulsion of members, indemnities and insurance, restrictive covenants. Any written LLP agreement is a private document, which is confidential to the members.

Professionals who use LLPs tend to rely heavily on reputation. Most LLPs are created and managed by a group of professionals who have a lot of experience and clients between them. By pooling resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. Most important, reducing costs allows the partners to realize more profits from their activities than they could individually.

The partners in an LLP may also have a number of professional workers in the firm who work for them in the hopes of someday making full partner. These professional workers are paid a salary and often have no stake or liability in the partnership. The important point is that they are designated professionals qualified to do the work that the partners bring in. This is another way that LLPs help the partners scale their operations. Professional workers take away the detail work and free up the partners to focus on bringing in new business.

The internal structure of LLPs is flexible because of the easy platform to bring partners in and let partners out. Because a partnership agreement exists for an LLP, partners can be added or retired as outlined by the agreement. This comes in handy as the LLP can always add partners who bring existing business with them. Usually, the decision to add requires approval from all the existing partners.

Overall, it is the flexibility of an LLP for a certain type of professional that makes it a superior option to an LLC or other corporate entity. Like an LLC, the LLP itself is a flow-through entity for tax purposes. This means that the partners receive untaxed profits and must pay the taxes themselves. Both an LLC and LLP are preferable to a corporation, which is taxed as an entity and then its shareholders are taxed again on distributions.

 

 

FORMATION OF LIMITED LIABILITY PARTNERSHIP

Two or more people associated, and carrying on a lawful business with a view to profits must form an LLP. See Section 753 (1) (a) of CAMA 2020. It is worth noting that some regulatory bodies may prevent their members from operating as LLPs.

Section 747 of CAMA 2020 provides that a person is not qualified to join an LLP as a partner if he has been declared to be a person of unsound mind by a court in Nigeria or elsewhere or if he is an undischarged bankrupt. During Incorporation or change of name of an LLP, there are certain restrictions on the choice of name to be registered at the Corporate Affairs Commission. An application for registration or change of name of an LLP could be rejected if the Commission finds it undesirable or if it is identical or nearly resembles that of any other partnership, business name, limited liability partnership, body corporate, or a registered trademark. See Section 757 (2) of CAMA 2020.

Importantly, all LLPs must end with the words ‘Limited Liability Partnership’ or their abbreviations ‘LLP’. See Section 757 (1) of CAMA 2020.

LLP PARTNERSHIP DEED/MEMBER’S AGREEMENT

It is important to prepare an LLP agreement or partnership deed, which will govern the rights and duties of the members (the equivalent of articles of association for a company). An LLP agreement is a private document that does not have to be disclosed to the outside world. The agreement can be tailored precisely to suit the requirements of the members (subject to statutory requirements).

Another important function of an LLP agreement is to determine the means of resolving any disputes that may arise between members. In the absence of a well-drafted agreement, there could be some uncertainty as to how disputes might be resolved. The relevant clauses in LLP Agreement or Partnership Deed includes but not limited to the following clauses.

Equal shares: All members are entitled to share equally in the capital and profits of the LLP. There is no mention of losses because, unless specified otherwise, the LLP bears its own losses. The losses may or may not be allocated to members by the LLP agreement. Care should be taken to ensure that the members’ limited liability is not jeopardized.

Indemnity for payments and personal liabilities: The LLP must indemnify each member for payments made by him and personal liabilities incurred by him in the ordinary and proper conduct of the business or anything necessarily done for the preservation of the business or property of the LLP.

Involvement in management: Every member may take part in the management of the LLP. Exclusion from management could result in a member bringing a claim for unfair prejudice.

No remuneration: No member is entitled to remuneration for acting in the business or management of the LLP.

Consent of members required for new members and assignments: No person may be introduced as a member or may voluntarily assign an interest in an LLP without the consent of all existing members.

Decision-making: a majority of the members may decide any difference arising on ordinary matters connected with the business. Any proposed change to the nature of the business requires the consent of all members.

Access to books and records: Books and records must be made available for inspection. Every member may, when he thinks fit, have access to the books and records to inspect and copy them.

Duty to give true accounts and full information: Each member must give true accounts and full information of all things affecting the LLP to any other member or his legal representatives.

Duty of good faith: The Act does not indicate whether the members’ relationships with each other and the LLP are of a fiduciary nature. As the members are agents of the LLP, it is likely they will be held to owe fiduciary duties to the LLP but it is not clear whether they owe any such duties to each other. Members may wish to provide for fiduciary duties in the LLP agreement.

Duty to account for profits from competing business: If, without the consent of the LLP, a member carries on any business of the same nature that competes with the business of the LLP, that member must account for and pay to the LLP all profits made by him in that other business.

REFERENCE:

1. sections 746 CAMA 2020.

2. Part B of CAMA 1990.

3. Section 746(1) of CAMA 2020.

4.Section 746 (1) of CAMA 2020.

5. 756 of CAMA 2020.

6. Section 746 (2) & (3).

7. Section 748 of CAMA 2020.

WRITTEN BY: CHAMAN LAW FIRM TEAM

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