The concept of partnership embodies a relationship that exists between persons who carry on business in common with the view to making a profit.Therefore, a partner may be described as a person who enters a partnership relationship. The basic elements of a partnership are that there is an association of persons; undertaking a business; which must be carried out with a view to profit; and it must be carried out by or on behalf of the alleged partners in common.The concept of partnerships has evolved over time mainly with the aim of mitigating the liability issues inherent in the classic partnership form that evolved under common law.
There are three partnership forms envisioned under Kenyan law being the general or ordinary partnerships; limited partnerships whether foreign or otherwise; and limited liability partnerships. A general partnership consists of general partners, each taking part in the management of the firm and also takes responsibilities for its liabilities. If one partner is sued, all partners will be held liable. A limited partnership, whether local or foreign, consists of both general and limited partners. The latter do not participate in the daily affairs of the business and their liability is limited. Limited partners are often termed as mere investors who do not participate in the business other than invest and receive a share of the profits. A limited liability partnership combines the features of partnerships and corporations. All partners have limited liability thus partners are neither personally liable for acts done for the business nor the acts of other partners or employees. Although a partner may be personally liable for his wrongful acts, other partners are protected from liability for those acts. Consequently it has become more preferable because of the limits of liability.
This paper traces the life of a limited liability partnership from its birth to its death while drawing comparisons with and distinctions from limited and general partnerships as well as the advantages or otherwise of this form of partnership in relation to the others. The limited liability partnership is a creature of the Limited Liability Partnership Actalthough its provisions may be complemented by those of the Partnerships Act so far as the provisions of the former do not expressly apply.
FORMATION OF A LIMITED LIABILITY PARTNERSHIP
The life of a limited liability partnership begins at registration which may be done by two or more persons proposing to form a limited liability partnership lodging the proposal with the Registrar.There are also provisions for the conversion of either a general partnershipor a private companyto a limited liability partnership. The provisions for conversion especially for companies presents an advantage of LLP’s over companies because of the ease of formation and dissolving thus making them particularly useful for particular or specific transactions. Also, an LLP is less regulated than a private company and in terms of tax benefits, it may be preferable to a company because currently partnership income is taxed at the individual partners level and not at the firm level, whereas companies are taxed at the entity level which is much higher plus any shareholders’ dividends which are also taxed directly. Saving on tax obligations increase shareholders’ value.
Every person proposing to form a limited liability partnership must sign statements containing information such as the name of that partnership; the general nature of the proposed business; the proposed registered office which must be situate in Kenya; the name, identity document (if any), nationality, and usual place of residence of each person who will be a partner and if any of these persons is a body corporate, its corporate name, place of incorporation or registration, registration number (if any), and the registered office of the body to which all communications may be addressed; the name, identity document (if any), nationality and the usual place of residence of each person who will be a manager of the partnership and, if any such person is a body corporate, the corporate name, place of incorporation or registration number (if any) of the body; and the registered office of the body to which all communications may be addressed; and such other information concerning the proposed limited liability partnership as may be prescribed by the regulations. In relation to the name of the business, the requirements are that the name must end with the phrase ‘Limited Liability Partnership’ or the abbreviations ‘LLP’ in either upper or lower case.Also, it should not be prohibited by law; undesirable; identical to that of any other business name or that which has been reserved in the LLP, Business Names or Companies Acts. Further, all invoices or other documents relating to the business must bear the name and registration number of the partnership and a statement that it is registered with limited liability.Non-compliance with these requirements regarding names amounts to offences punishable by fines.
On receiving the statement constituting the proposal, the Registrar, being satisfied that all the aforementioned requisites have been met is required to register that statements and issue a certificate of registration to the persons who lodged them. Such certificate is conclusive evidence that all statutory requirements have been complied with and that the said business has been registered by the name specified therein. Suffice to note that the Registrar may refuse to register a limited liability partnership on various grounds being that he is not satisfied with the information provided with regard to an entity; the formal specifications of the statements of proposal have not been satisfied; that the statutory requirements have not been met;on certain national security or public interest grounds;or the name proposed is unsuitable.He must notify the applicants and give reasons in writing for refusal and the applicant must have an opportunity to give reasons why the entity should be registered. He further has a right of appeal to the Minister concerned that is exercisable within thirty days of being notified of that decision.
Whereas the formation of a LLP is through registration under the Act, the formation of a general partnership is not clouded in formalities. It only requires an agreement which could be oral, in writing whether sealed or not or implied through the parties’ conduct. It only needs that the name is registered under the Business Names Act. However, the partners may choose to put their agreement in a formal document called the Partnership Deed or Agreement or Articles of Partnership setting out the terms and conditions of the association. It has information on the nature of the business; each partners’ capital share contribution; profit sharing ratio; rules for determination of interest on capital; method of calculating goodwill; the partners’ powers; accounts and audit; expulsion of partners; and/or arbitration. In its absence, the general rules applicableare that profit and loss are shared equally, a partner who incurs liability while discharging the firm’s obligations must be indemnified; a partner who lend money to the firm is entitled to interest at the rate of 6% per annum; there can only be a change of business or admission of a new partner with all the existing partners’ consent; a partner is not entitled to interest on capital before the ascertainment of profit; every partner is entitled to take part in the management of the business; the books of account must be accessible to all parties; and that a partner can only be expelled from a partnership if the power to do so has expressly been vested in the other partners. Further, it is prohibited to form a partnership comprising more than twenty personsbut LLP’s are not subject to this restriction thus presents another advantage of LLP’s.
Limited partnerships are also formed, like LLP’s, through registration under the Partnerships Actwhile a person becomes a limited partner upon registration under the Act.
In this paper, capacity has been used in two ways. First, it is used to refer to the capacity of a limited liability partnership in terms of the entitlements that accrue to the entity upon registration and second, capacity in terms of who may become partners in a limited liability partnership.
In the first sense, suffice to note that the effect of registration of a limited liability partnership is that it becomes a body corporate with a legal personality separate from that of the constituting partners.Consequently, it acquires all the attendant attributes of a juristic person such as perpetual succession thus a change in its partners does not affect its existence, rights or obligations; in its name, can sue or be sued; acquire, own, hold and develop or dispose of movable and immovable property; acquire and maintain a common seal that bears its name and to use the seal for the execution of all documents that by law are required to be sealed; and do such other acts and things as a body corporate may lawfully do.A general partnership may also sue or be sued in its own name; enter into contracts and own or hold property for the purposes of the business of the partnership; and subject to the partnership agreement, providing continuity for the partnership business despite a change in the partners. Further, it has unlimited capacity as a legal person thus has no capacity to commit offences unless as stipulated by written law.
This attribute of a separate legal personality presents a LLP’s greatest advantage over other forms of partnerships in numerous ways. It can consequently enter contracts in its own name as opposed to general partnerships where the partners contract in their own names; the business acquires a corporate identity thus distinct from the partners as opposed to other partnerships where property, for example, had to be held in the names of the partners jointly; Also, with regard to holding property, the title always remains in the LLP regardless of change in partners compared to general partnerships where the process of changing such title is cumbersome in the event of change of partners; there are also more borrowing options available to LLP’s because the firm gives the guarantee or security thus reducing investor’s risks, compared to general partnerships where the individual partners act as personal guarantors.
Capacity in the second sense, a natural person or a body corporate may become a partner in a LLP. However, a trade union, although a body corporate, is disqualified from being such a partner.In light of these provisions, it necessarily follows that provisions of the Partnership Act on who may become partners apply. Therefore, everyone is capable of being a partner in a firm. Minors may also do so although they cannot be sued for trade debts and can only be made Bankrupt in respect of debts which are legally enforceable against them. In the event of partnership between an adult and an infant, if the partnership owes debts judgment for such debts will either be against the adult partners alone or preferably against the firm but excluding the infant partner. In a judgment under any of these forms a receiving order might be obtained against adult partners and in subsequent bankruptcy proceedings partnership assets could be given for distribution to creditors. On attaining the age of majority an infant partner could either terminate the partnership in order to escape liability or else he will be equally liable with his adult co-partners. In relation to persons of unsound mind, if he enters into a contract of partnership and afterwards pleads insanity, the contract will still be binding even if he proves that he was insane unless he can also show that the other partner knew or was capable of knowing him to be insane. Unsoundness of mind therefore is not of itself a bar to enter into partnership and even the subsequent insanity of a partner does not automatically dissolve the partnership but it is a ground for applying to court for dissolution of a partnership. Upon such application if the court is satisfied that the alleged insane person is actually so, then the court will grant an injunction restraining him from interfering with the business.An advantage of the LLP in this regard is that corporate bodies can become partners as opposed to general partnerships where only natural persons can be partners. Further, there are varied options of those who can form LLP’s being either two companies’ or individuals or a company and an individual. Such options are not available for other forms of partnerships. Minors can only become members of a limited partnership with the consent of all the partners.
A limited liability partnership shall be solely obligated to an issue arising from either contract or tort and in respect of these, the liability of partners is limited. Therefore, a person is not personally liable, directly or indirectly, for an obligation arising from the aforementioned situations only because the person is a partner of the limited liability partnership. However, this does not affect the personal liability of a partner in tort for their wrongful act or omission but if that partner is liable to a person other than another partner of the partnership as a result of his wrongful act or omission in the course of the business of the limited liability partnership or with its authority, the partnership is liable to the same extent as that partner. The liabilities of a limited liability partnership are payable out of its property. Further, a partner is not personally liable for the wrongful act or omission of another partner of the limited liability partnership.
In general partnerships, the liability of the partners is unlimited while for limited partnerships, the general partners have unlimited liability while limited partners enjoy limited liability.Therefore, each general partner is liable for the wrongful acts of another partner in the course of the business of the firm. A firm is liable for acts committed against third parties by any of the partners in the cause of the partnership business. Liability for debts and other contractual obligations is joint while that for torts is both joint and several. Thus with regard to debts and other contractual obligations, the plaintiff can bring only one action but in tort he may find separate actions against each partner. Liability lasts from the time one becomes a partner until dissolution and winding up of the business. Consequently a new partner is not liable for old debts and a retired partner is generally not liable for future debts. These principles may however be negated by the doctrine of novation which is an arrangement whereby a new partner agrees to be liable for existing debts or whereby a retiring partner undertakes to be liable for future debts. Every person who by words spoken or written or by conduct represents himself or who knowingly suffers himself to be represented as a partner in a particular firm is liable as a partner to anyone who has on the faith of such representation given credit to the firm.
RELATIONS BETWEEN PARTNERS AND THIRD PARTIES
An agency relationship subsists between a partner and a limited liability partnership. However, the business will not be bound by the acts of a partner in relation to a third party if either the partner, in fact, has no authority of the business to act in that way, the third party knows that the partner has no authority or he does not know or believe that person to be a partner of the limited liability partnership. Further, a partner who has ceased being in the business is deemed as still being part of the business in relation to a third party unless the third party has notice that the particular partner has ceased to be a partner of the limited liability partnership or notice of the fact that the partner is no longer part of the entity has been delivered to the registrar.
An agency relationship subsists between each partner and the firm and amongst the partners inter se thus every partner is an agent of each other and the firm. A partner exercises both real and ostensible authority, and the firm is generally liable for debts arising in the conduct of a partner.
However, for the firm or other partners to be held liable for the acts of a partner, it must be evident that; the partner was acting in the business of the firm; he was acting in the usual way; and he was acting in his capacity as a partner. However, situations may arise where a partner is held personally liable. For instance, if he is prohibited from acting on behalf of the firm or signs a document without express authority. A third party who has contracted with partnership may either sue the partner he dealt with or all the partners and if a single partner is sued and his assets cannot make good the firms’ liability, the other partners cannot be sued. Suing all the partners enables the plaintiff to execute is judgment against all the partners since they are jointly liable. Unless otherwise agreed, the liabilities of a former partner cease when he ceases membership while that of a new member accrue from when he joined the firm.
RELATIONS BETWEEN PARTNERS INTER SE AND WITH THE LLP
The relationship of the partners inter se and that of the partners and the limited liability partnership are governed by the limited liability partnership agreement which sets out their respective and mutual rights and obligations. In the absence of such agreement, default provisions contained in the First schedule to the Act apply. Decisions of the entity are made through resolutions passed by a validly constituted quorum as may be stipulated by the agreement or by all the partners unanimously if no agreement exists.
In a general partnership, the relationship between partners inter se is governed by the agreement between them while agency governs that between the partners and the firm. However, a partnership agreement is a contract of utmost good faith. Each partner is entitled to utmost fairness from the co-partners. Therefore, a partner with an interest in a transaction involving the firm must disclose; secret profits must be accounted for; a partner mat not compete with the firm; and a partner can only be expelled from the firm only in good faith.
CESSATION FROM PARTNERSHIP
A partner may exit from a limited liability partnership either by following the provisions of the limited liability partnership agreement; giving at least ninety days’ notice of the intention to resign to the other partners; or upon death of that partner or on dissolution of the partnership. Resignation or death of a partner extinguishes all his management rights such that his personal representative or a liquidator cannot interfere with the management of the partnership. The interests of a resigning or dead partner are further secured because that partner, his personal representative or assignee is entitled to receive from the partnership an amount equal to the partner’s capital contribution to the entity and his right to share in the accumulated profits of the entity after the deduction of the losses of the business which is determined as of the date the partner ceased membership.
A person ceases to be a member of a general partnership if he dies; is expelled by his partners;the partnership is dissolved; a Court order is made to remove the partner;a bankruptcy award or an award for sequestration against the partner is made; or upon resignationafter giving at least three months’ notice of the intention to do so. Partners in a limited partnership are prohibited from expelling a limited partner.However, a limited partner ceases to be one when he is deregistered; dies or the partnership is dissolved.
EFFECT OF BANKRUPTCY OF A PARTNER ON A LIMITED LIABILITY PARTNERSHIP
The effect of a partner’s bankruptcy may be stipulated by the partnership agreement and if there is none or its provisions are inadequate in this regard, the rule is that the bankruptcy of a partner does not cause him to cease being a part of the entity although he becomes disqualified from participation in the management of the entity. Although the official receiver or the trustee in bankruptcy may not interfere with the management of the entity, he is entitled to receive distributions of profits from the LLP which the bankrupt partner is entitled to receive. On being declared bankrupt, a partner ceases to be part of a general partnership.
MANAGEMENT OF THE LIMITED LIABILITY PARTNERSHIP
A limited liability partnership must have at least two partners and one manager. It is an offence to carry on business as a LLP by one person for more than two years. That person becomes personally liable, jointly and severally with the partnership for the obligations of the partnership incurred during that period if that person was a partner of the business and knew or ought to have known that the business was being done in that manner. The manager must be a natural person above eighteen years old. His particulars must be lodged with the Registrar in the prescribed form together with that persons’ consent to act in that capacity. His role is to ensure that the firm lodges annual declaration of solvency or insolvency; to file changes in the registered office of the firm; and ensure that the invoices and other documents of the firm bear the name and registration number of the partnership and also state that it is registered with limited liability.He is personally liable for all penalties imposed for failure to discharge his duties unless he can prove that he is not liable. If the firm fails to appoint a manager as stipulated it commits an offence punishable by a fine of up to one hundred thousand shillings. This is the same for failure to lodge the manager’s particulars with the registrar.If there are more than one managers, any act required to be done by a manager may be done by any of them. Anything that constitutes an offence by a manager constitutes an offence by each of them.
Further, a limited liability partnership must keep accounting and other records to sufficiently explain the transactions and financial position of the partnership and ensure a profit and loss account and a balance sheet is prepared from time to time which gives a true and fair view of the state of affairs of the partnership. A firm must retain its accounting records for not less than seven years after completion of the matters to which they relate. The accounting records must be kept safe and remain open to inspection at all times by the partners. The Registrar may, by notice in writing to the limited liability partnership or any of its partners, require the partnership or that partner to produce the partnership’s accounting records for inspection by him at such time or with such period, and at such place, as is specified that notice. Failure to comply with these provisions give rise to an offence which both the partnership and each of the partners are liable on conviction to a fine, imprisonment or both for a natural person and a fine for a body corporate.
In both LLP’s and general partnerships, each partner is entitled to participate in the management of the partnership.However, a limited partners’ role in a limited partnership is restricted and he cannot take part in the management of the firm.
ASSIGNMENT OF PARTNERSHIP INTEREST
The partnership agreement may also provide for the assignment of a partner’s interest. If it does not, a partner may assign the whole or any part of his interest in the partnership but only to the extent that the assignee becomes entitled to receive distributions from the partnership that the assignor would otherwise have been entitled to receive. The effect of an assignment is termination the partner’s interest in the partnership and entitles the assignee to participate in the management of the limited liability partnership. There seems to be an inconsistency within this provision because one sub-section only entitles the assignee rights to receipt of distributions from the partnership while anotherentitles the assignee to participate in the management of the partnership. My submission is that preference should be given to the latter provision because an assignee should be entitled to all the rights and obligations that accrue to an assignor.
In general partnerships, one may assign his interest in the firm and the assignee becomes entitled to the assignor’s profit share. However, he does not become a partner unless all other partners have agreed. Therefore, the assignee can neither participate in the management of the business nor inspect the partnership’s records.An assignee of a limited partner may become a partner of the firm if all the general partners agree to the substitution and if it is done according to the partnership agreement.
DISSOLUTION OF A LIMITED LIABILITY PARTNERSHIP
A partnership may terminate due to the death of a partner or by dissolution which may be effected through an agreement between the partners or by an order of the court. By agreement, it may be dissolved at the expiration of a fixed period if contemplated; upon completion of the specific purpose it was formed for; by notice of the intention to dissolve to other partners; or as a result of death or bankruptcy of any of the partners if no agreement to the contrary exists. An application to the court to dissolve may be made if partner is adjudged a lunatic or he is shown to the satisfaction of the court to be of permanently unsound mind; if a partner other than the applying partner becomes in any way permanently incapable of performing his part of the partnership contract or has been found guilty of such conduct as in the opinion of the court is calculated to affect prejudicially the carrying on of the business; if a partner other than the one applying wilfully or persistently commits a breach of the partnership agreement or otherwise conducts himself in matters relating to the partnership business in such a way that it is not reasonably practicable for the other partners to carry on business with him; if the business of the partnership can only be carried on at a loss; or whenever in any case circumstances have arisen which in the opinion of the court renders it just and equitable that the partnership be dissolved. On dissolution of a partnership or retirement of a partner any partner may publicly notify the same and require the others to assist in all other acts for dissolution. After dissolution the authority of each partner to bind the partnership and the other right of obligations of a partner continue as far as necessary to wind up the affairs of the partnership and complete any transactions which were began but not finished by the time of dissolution.
The differences in dissolution among the three forms of partnerships relates to the procedure which are set out in the respective legislation for each form of partnership.
In light of this discourse, it is clear that the LLP is a better form of business entity compared to other partnership forms. It adds onto the advantages of partnerships generally its own benefits making it a superior business entity to the rest suitable for contemporary business relations. It is therefore advisable that it is adopted by business people to enhance efficiency.
 Partnerships Act No 12 of 2012, s 2 hereinafter PA
 Partnerships, Kenya Law Resource Centre available at www.kenyalawresourcecentre.blogspot.com retrieved on August 9th 2013
 Act No 42 of 2011
 Act No 16 of 2012
 Section 8
 Limited Liability Partnership Act No 42 of 2011, Section 16 hereinafter LLP Act
 Section 24 and Second Schedule LLP Act
 Section 25 and Third Schedule LLP Act
 Section 31 LLP Act
 Section 17 LLP Act
 Section 20 LLP Act
 Section 32 LLP Act
 Sections 20 (4) and 32 (2) and (3) LLP Act
 Section 18 LLP Act
 Section 4 LLP Act
 Section 17 (5) LLP Act
 Section 18 (3) LLP Act
 Section 19 LLP Act
 Section 21 LLP Act
 Section 22 LLP Act
 Section 23 LLP Act
 Sections 28 and 29 PA
 Section 389 Companies Act
 Section 68 and 69 PA
 Section 57 (1)
 Section 6 LLP Act
 Section 7 LLP Act
 Section 8 PA
 Section 9 PA
 Section 9 LLP Act
 Ibid note 2
 Section 10 LLP Act
 Section 4 and section 59 PA
 Section 17 PA
 Partnerships, Kenya Law Resource Centre available at www.kenyalawresourcecentre.blogspot.com retrieved on August 9th 2013
 Section 25 PA
 Section 11 LLP Act
 Ibid note 33
 Section 12 LLP Act
 Ibid note 33
 Section 13 LLP Act
 In accordance with section 29 PA
 In accordance with section 44 PA
 In accordance with section 28 PA
 Section 62 (2) PA
 Section 57 (2) PA
 Section 14 LLP Act
 Section 27 (e)
 Section 26 LLP Act
 In accordance with section 29 LLP Act
 In accordance with section 33 LLP Act
 In accordance with section 32 LLP Act
 Section 27 LLP Act
 Section 28 LLP Act
 Section 30 LLP Act
 Article 4, First Schedule LLP and section 7 (1) PA
 Section 58 PA
 Section 15 LLP Act
 Section 15 (2) LLP Act
 Section 15 (3) LLP Act
 Section 34 PA
 Section 62 (3) PA