News and Insights
1 August 2018
The Limited Liability Partnerships (Jersey) Law 2018. Third time lucky?
LLPs were first created in Jersey by the Limited Liability Partnerships (Jersey) Law 1997 (“the 1997 Law”) and much has happened since then.
An LLP is a form of partnership with separate legal personality, meaning that it can own property, sue, and be sued in its own name, rather than that of the individual partners. Furthermore the partners enjoy the protection of limited liability, so that if the partnership business becomes insolvent the partners’ responsibility to meet the debts is limited to the value of their interest in the assets of the LLP. Their personal assets need not be realised to meet the debts of the partnership, as would be the case in a traditional customary law partnership.
The story so far
The 1997 Law was introduced, amid much political controversy, to encourage English firms and specifically members of the magic circle of accountancy practices, to set up off-shore, as there was no suitable equivalent legislation available to them in the UK. However in order to protect these firms’ clients and creditors the 1997 Law included a requirement to deposit a £5 million cash bond with a bank or insurance company upon establishment, thus creating a war chest to mitigate the effect of their partners’ limited liability. Alas it turned out there were few firms around with that sort of money to spare.
To complicate matters further, the UK tax authorities announced, prior to the enactment of the 1997 Law, that they would not recognise the Jersey LLP as a partnership for tax purposes, meaning Jersey LLPs would not benefit from tax transparency in the UK, an essential part of the LLP’s intended appeal.
Finally the UK announced its intention to introduce its own LLP legislation, which came into force in 2001 and did not include the £5 million cash bond requirement.
Over 26,000 UK LLPs were established over the next 7 years but not a single Jersey LLP was ever set up.
In an attempt to compete, in 2013 Jersey abolished the £5 million cash bond requirement replacing it with a requirement to submit an advance annual solvency statement. Similar statements have become an increasingly common feature of Jersey’s company law, used as a means to manage the risks arising from the gradual move away from corporate capital maintenance rules. The statement required the LLP to state that, for the coming 12 months, it expected to be able to continue in business discharging its liabilities as they fell due.
Effect of the new Law
The new LLP Law of 2018 therefore aims to re-launch the Jersey LLP by making four key changes to the current regime, as follows;
- Power of Registrar to dissolve the LLP: In keeping with the theme of closer regulatory oversight the new Law contains provisions allowing for the JFSC’s Registrar of Jersey companies and other entities to dissolve an LLP for a number of reasons, including;
- Failure to appoint a secretary,
- Failure to provide the secretary with any accounting record or annual return,
- Failure to send any annual return or specified solvency statement to the Jersey Financial Services Commission;
- Failure to pay any Jersey Financial Services Commission fees; and,
- Failure to have a registered office in Jersey.
So will we see a growth in the use of the Jersey LLP following the new Law?
Jersey finance industry consultations and reports identified that tax transparent Jersey LLPs had potential for use in areas such as securitisation, collective investment funds, and wealth management. With this in mind the new Law also permits a partner of an LLP also to be an employee of the partnership and to be able to enter into transactions with it.
These changes are encouraging and Jersey has certainly played its part in ironing out the wrinkles that afflicted the 1997 Law. However a major hurdle facing Jersey LLPs is that HMRC continues to treat them as opaque for UK tax purposes. Their profits and losses are thus attributed to the partnership itself rather than to the partners. It is therefore unlikely Jersey LLPs will see significant growth from the UK even after implementation of the new Law.
How to create, or convert to, an LLP
To create a new LLP will be fairly straightforward:
- Application for registration must be in the form of a declaration, made and signed by a person authorised to sign by every person who is to be a partner on registration. The declaration must include:
- The proposed name of the LLP
- The intended address of the registered office of the LLP
- The name and address of each person who is to be a partner of the LLP
- The name and address of the proposed Secretary
- If the registrar is satisfied with the application, they will register the LLP and issue a certificate of registration, which states the date on which registration takes effect, as well as a number or identifying code.
However, to convert an existing partnership into an LLP is more complex as this involves the creation of the new LLP separate from the old partnership, and transfer of all existing business, assets and liabilities by the existing partners of the old partherhship to the new LLP. This will consist of a number of things, including:
- Transfer all other assets from the partnership to the LLP.