Recession hit business owners, operating as a partnership, are being urged to reorganise their firm “as a matter of urgency” to reduce the risk of personal liability for business debts.
Leading law firm, Mace & Jones, said it is advising an increasing number of partnerships, feeling the heat of the financial crisis. Many have no legal documentation leaving them dangerously exposed.
Partnership unit partner Graeme Jump, said he is seeing two types of partnership – those badly holed by the recession storm and in distress and those managing to keep afloat but looking for the weight of greater protection.
“These are unique economic times,” he said. “The wrath of the recession is bearing down on traditional business partnerships which are often not equipped to protect their owners. Partnerships can be a pussy cat and in this recession some bosses are coming around to thinking they need a tiger to protect them. The prime concern for bosses is their personal liability for the debts of the business. The reality of personal liability is being brought home, in some cases, for the first time. Some partners are finding this very uncomfortable and are wondering how to restructure.”
Limited Liability Partnership (LLP)
For those businesses wanting better protection, Mr Jump pointed to the model of the limited liability partnership (LLP).
“Often the best option for partners wanting more protection of their personal wealth is to remodel their partnership as a LLP,” he said.“The LLP strengthens the firm and reduces risk. The clinching factor with an LLP is that the business, not the partners, have legal liability to third parties. So, the personal assets of a member of an LLP will not generally be at risk for acts of the LLP or its members.
The tax advantages of the LLP model also make it attractive. However, in the current climate it is the protection that an LLP gives that is its most compelling selling point.”
You can also read Bytestart’s dedicated guide to setting up a limited liability partnership.
Seek expert legal advice if your partnership is in distress
Mr Jump advised partnerships in severe distress to seek expert legal advice immediately.
“The real value in partnerships is the professional qualification and skills of the partners,” he said. “However in most cases, a formal bankruptcy process will disqualify the professional from practising their skills. It is critical therefore that the legal process does all it can to ensure the partners can carry on practising.”
Mr Jump said it is necessary always to keep in mind that each partner will have different personal assets and debts but common business debts, namely the creditors of the partnership.
“Through the mechanisms of individual voluntary arrangements (IVA), partnership voluntary arrangements (PVA) and administration orders (see background), there is the opportunity to protect the inherent value of the partnership by paying off debts in an orderly way. However, that alone may not be sufficient in some cases. In this instance what is often required is a merger or acquisition of the distressed business with a much stronger business. But as always it is vital to act fast so all available options can be explored.”
Types of arrangement
Individual Voluntary Arrangement (IVA)
This works by settling debts within a reasonable and fixed period of time, normally five years. Any interest and debt charges will be frozen and creditors will be prohibited from demanding additional payments.
Partnership Voluntary Arrangement (PVA)
The PVA allows the partnership to continue trading so that it can repay debts from its current assets and future profits. However, unlike the IVA, a PVA does not provide the partnership with protection if a debtor is determined to pursue its claims against the partnership in the period before the creditors meeting that must be called under the PVA.