Limited appeal – personal liability and the law firm limited company

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14 February 2014

Posted by Nigel Wallis, partner, O’Connors LLP

“If I get married, I want to be very married.” Audrey Hepburn

The first week of January rather took us by surprise.

Quite literally, our first three phone calls were from law firm managing partners asking for help in converting their traditional partnership to a limited company.  Not the most flexible of vehicles for professional firms, historically.

So you want to be very married then, we thought.  But decided to hear them out.

Boiling it down, each had their own commercial and financial drivers.  But the one overwhelming theme was that being in business today especially in a sector undergoing such monumental structural change with unlimited liability is not the greatest place to be.

Of the 500+ law firm managing partners we are in regular contact with, 37% currently manage a traditional partnership, 26% an LLP and 37% a limited company.  In 2013, 6% of them converted from traditional partnership to an LLP or limited company.

Given this drive towards limiting liability, and at the risk of teaching Audrey Hepburn to sing Moon River, we offer up our TOP 10 TRAPS where personal liability can remain post conversion.

1.      Banks requiring personal guarantees as part of a security package for continuing or extending the borrowings of an LLP or limited company.
2.      Landlords requiring lease obligations to be personally guaranteed.
3.      Reimbursement of PII policy excesses and liabilities as a named insured.
4.      Liability for personal loans used to capitalise firms.
5.      COLP, COFA, MLRO and director duties and responsibilities.
6.      Liability for overdrawn capital accounts or unauthorised dividends.
7.      Residual liabilities of a former partnership not wound up post conversion.
8.      Liabilities of individuals who unwittingly contract in their own name and not on behalf of their LLP or company, in the absence of ratification.
9.      Liability for personal tax and, of course, illegal activity such as fraud.
10.  Liabilities of an LLP or company that are assumed by individuals in LLP agreements and shareholders’ agreements – yes, it does happen.

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