PARTNERSHIPS

BY MAHAT SOMANE

THE LIMITED LIABILITY PARTNERSHIP

The Limited Liability Partnership Act, 2011 was assented

into law and commenced operation on 16th March, 2012. The

Act repeals Limited Partnerships Act, Cap 30 of the Laws of
Kenya, which previously governed the formation, management
and regulation of limited partnerships.

Some of the important features of an LLP include:

It is established through registration under the Act;
It must have at least 2 partners and 1 manager. The partners

may be natural persons or a bodies corporate. The manager

must be a natural person;
An LLP is a separate legal entity from its partners. In this
respect, it is similar to a company, and different from a typical
partnership;

 Partners of an LLP are not liable for the firms debts and

obligations nor are they liable

for each others debts and obligations. This is not the case
with general partnerships;
However, individual partners in an LLP are liable for their

own wrongful acts or omissions. The LLP is also liable for

a partners wrongful acts or omissions, to the same extent
as that partner, where the partner is engaging in the LLPs
business or acting with
its authority.

 The LLP structure provides a potentially useful alternative

business vehicle to the private company. It has the

benefit, at least at present, of being less regulated than a
private company.
From a tax perspective, it may prove more effective than a

company because currently partnership income is taxed in

the hands of the individual partners and not at the firm
level, whereas companies are taxed at the entity level and
any dividends also taxed in the hands of shareholders.

 It is not required that an LLP creates a constitution/

Memorandum or Articles of Association. However, the Act

provides that the Partners to an LLP would execute a
Limited Liability Partnership Agreement to set out the
agreement between the members. The LLP does not file
any form of constitution. In this agreement, the members
can agree on profit sharing, capital contributions, roles/
duties, management or other arrangements amongst
themselves and change those arrangements as often as
they agree.

 It remains to be seen whether the Government will

propose taxing the LLP at firm level given its separate

legal personality.
In some other jurisdictions that have introduced LLPs,
such as the UK, India and the USA, the LLP has generally
been treated as a pass through vehicle for tax purposes,
thereby increasing its attractiveness as a business
vehicle. Provided that Kenyan income tax laws are not
amended to impose a tax on the LLP at firm level, then
the LLP will also provide a superior alternative business
vehicle to a general partnership.

 This is because the LLP will provide the same pass through

taxation benefit as a general partnership, but in addition, offer

limited liability to the partners akin to that offered by a company
to its shareholders.

Another potential benefit of an LLP over a general partnership

is that the number of partners is not restricted.

An unusual feature of the LLP Act is that it prescribes

mechanisms to convert existing partnerships and private

companies into LLPs. This appears to suggest that
Government is interested in encouraging the use of this type of
business formation, particularly for small to medium size
enterprises, which would typically use the other types of
business formation.

Registration of an LLP
An LLP may be registered reserving the proposed name. The

name is reserved for a period of two months from the date on

which the application for reservation was lodged with the
registrar.
Thereafter, two or more persons desirous of conducting
business for profit [therefore, LLPs cannot be registered with
only one proprietor or be used for charitable purposes] under
the reserved name may lodge the prescribed form with the
registrar. The statement should contain:

1. name of that LLP (which name should not be: prohibited by

any law, undesirable, identical to that of any other LLP

corporation or business name, or identical to a name that is
being reserved under the LLP Act, the Business Names Act
or Companies Act)

1. nature of the proposed busines

2. the proposed registered office;
3. the name, identity document (if any), nationality, and

usual place of residence of each person who will be a

partner of the partnership;
4. if any of the persons referred to is a body corporate:
the bodys corporate name;
the bodys place of incorporation or registration;
the bodys 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

 The name of an LLP must end with the word LLP or its

long form. The Act also envisages change of name of the

LLP as the partners may wish from time to time.

Separate Legal Personality

The Act envisages that an LLP shall be a corporate entity
with a legal personality separate and distinct from its
owners. The now repealed Cap 30 envisaged
partnerships as separate from its owners and therefore,
under the former Act, the liability of the firm in the event of
insolvency could be settled from personal property of the
proprietors. In LLPs registered under the Act, the liabilities
of LLP are payable out of the property of the LLP

 Perpetual Succession
A limited liability company also enjoys perpetual

succession such that death or departure of a partner

doesnt affect the existence of the firm. This is
advantageous especially for professional services firms
because a change in the partners of the LLP does not
affect the existence, rights or obligations of the LLP.
Powers of an LLP
As an incorporated body corporate, an LLP may in its own

name and seal: sue and be sued, and hold and dispose of
property.

 Power to Form an LLP

Natural persons and body corporates (except trade

unions) may form an LLP.

Liability in an LLP
The liability of any partner in an LLP can only arise by

contract or tort, and may not arise solely for the reason of
one being a partner in an LLP. Accordingly, partners in an
LLP will agree on the degree of their liability in respect of
any matter.

 The Act doesnt waive liability for tortuous acts arising

from individual partners action or omission. By extension,

one partner in an LLP setup is not liable for wrongful acts/
omissions of another partner within the LLP.
However, an LLP would be responsible for a wrongful act
or omission committed by a partner to another person
(other than a partner of the LLP) in the course of the
business of the LLP or with its authority a person.

Agency Relationship between Partners

and LLP
Partners of an LLP exercised are agents of an LLP. Such

agency is however repudiatable in circumstances where:

(a) the partner in question acted without authority of the
LLP; or the person dealing with the partner knows that
that partner has no authority but proceeds to transacts
with such partner.
The Act also obliges LLPs to formally notify the Registrar
of any change in partnership of the LLP to avert adverse
claims.

Regulation of Partners Relation

Under the LLP Act, the relationship of the partners

themselves and the relationship between the partners and

the LLP are governed by the Limited Liability Partnership
Agreement. In the absence of such an agreement, the
First Schedule of Act which contains default provisions
regarding governance/management of would apply.
Decisions of the LLP are to be through resolutions passed

with the requisite quorum as may be stipulated in an LLP

agreement.

Cessation from Partnership

Partners in an LLP have three options for exiting the Firm,

namely:
a) In accordance with the provisions of an LLP agreement;
issuances of a 90 days notice to the other partners of
the LLP of the intention to resign;
b) issuances of a 90 days notice to the other partners of
the LLP of the intention to resign;
c) upon death of that partner or on dissolution of the
partnership.
Resignation or death terminates all management rights of
such a partner.

 The Act also protects the interest of resigning partner or

his/her beneficiaries (on death).

Accordingly, on resignation or upon death, that partner or
his personal representatives/assigns is entitled to receive
from the LLP an amount:
a) equal to the persons capital contribution to the LLP and
the persons right to share in the accumulated profits of
the LLP after the deduction of losses of the limited
liability partnership; and
b) determined as at the date the person ceased to be a
partner.

LLPs, LLP Partners and Bankruptcy

An LLP Agreement may restrict the application of

provision of the Act regarding management of bankruptcy

of partners.
Generally however, bankruptcy of a partner doesnt cause
such a partner ceasing being a partner in the LLP,
although such a partner may not participate in the
management of the Firm.
The above notwithstanding, an official receiver or a
trustee of the estate of the bankrupt partner is entitled to
receive distributions of profits from the LLP that the
bankrupt partner is entitled to receive under the LLP
agreement.

Assignment Rights
The Act is novel in that a partner in an LLP may, unless

otherwise provided under an LLP Agreement, assign his

rights to receive distribution from the partnership.
Whereas the assignment terminate the assigning

partners rights in the Firm, it entitles the assignee the

right to participate in the management of the Firm.
By reason of the assignment, anyone may become a

member of the LLP and participating in its management

affairs. Accordingly, this is an area that ideally should be
well considered when drafting an LLP Agreement.

 There appears to be an inconsistency between section 15

(2) and Section 15 (3) (b), as the former limits assignee's

rights to only receipt of distributions from the partnership
which the assignor would otherwise have been entitled to
receive, while the the latter entitles an assignee to
participate in the management of the partnership.
Conversion of Partnerships and Limited Liability

Companies to LLPs
The Act is novel in Kenya as it allows conversion of
partnerships and limited liability companies to LLPs.

 However, such conversion does not terminate rights and

obligations which subsisted immediately before the

conversion, which rights and obligations are transferred
by operation of law to the new LLP.
Requirement for a Manager
An LLP must have a manager who must be a natural

person, and whose particulars must be lodged with the

registrar in the prescribed form.

 The role of a manager is to ensure that the LLP lodges

annual declaration of solvency or insolvency, file changes

in registered office of the LLP and ensure that invoices or
other document issued relating to the partnership
business bears
a) the name and registration number of the partnership; and
b) a statement that it is registered with limited liability.

 LLPs have several advantages over other forms of

vehicles for conduct of business. LLPs are a cross

between a partnership and company structure.

They have principally been introduced to afford

professional services firms (PSFs) which mostly trade as

partnerships (accountants, lawyers, surveyors etc) the
opportunity to benefit from limited liability.

They provide partners in PSFs with the benefits of limited

liability, and accordingly protecting their personal assets

from any potential business creditors as is the case with
limited liability companies.

 While Limited Liability Companies (LLCs) can have multiple

members (upto 50), they are not as good at attracting investors

as LLPs.

In a LLP, unlike an LLC, a claimant may only direct his

negligence or malpractice claims toward the negligent partner,

and thus protecting the partnership and the other partners.

Accordingly, we expect that a majority of professional service

firms will henceforth be registered as LLPs rather than

business names under the Registration of Business Names Act
(Cap 499 of the Laws of Kenya) or limited liability companies
under the Companies Act (Cap 486 of the Laws of Kenya) or
converted to LLPs as envisaged under the LLP Act.

Features of an LLP
MEMBERSHIP: It must have at least 2 partners and 1

manager. The partners may be natural persons or bodies

corporate. However, the manager(s) must be a natural
person.

BODY CORPORATE: An LLP is a separate legal entity

from its partners. In this respect, it is similar to a company,

and different from a typical partnership. It thus can
acquire/own/hold and dispose of movable and immovable
properties (including land) and can sue and be sued in its
own name. Whereas the Act establishing LLP is silent, it is
believed that this Corporate feature enables an LLP to
create Securities for Loans and charge them like any
other Companies.

 LIABILITY: Partners of an LLP are not liable for the firms

debts and obligations nor are they liable for each others
debts and obligations. This is not the case with general
partnerships. However, individual partners in an LLP are
liable for their own wrongful acts or omissions. The LLP is
also liable for a partners wrongful acts or omissions, to
the same extent as that partner, where the partner is
engaging in the LLPs business or acting with its authority.

PERPETUAL SUCCESSION: LLPs enjoy Perpetual

Succession in that, in the event of death or exit of any one

or more Partners, the same does not affect the existence
of the LLP.

How to Register a Limited Liability

Partnership in Kenya
This is a new form of business association which came

into law through the LLP act on 16 March 2012. The LLP
combines some of the features of a traditional partnership
with the limited liability benefits more typically associated
with a company. The following steps elaborate on how to
set up a limited liability partnership in Kenya.
STEPS

I. NAME SEARCH
a) Submit a letter requesting reservation of your proposed
name to the registrar of companies
b) Pay a fee of KES.100 and wait for 3 days.

c) Collect a letter approving reservation of the proposed

name and a statement of particulars from the Registrar of
Companies.
FILING A STATEMENT OF PARTICULARS WITH THE
REGISTRAR OF COMPANIES
a) Submit to the registrar of companies a statement of
particulars which has to be signed by all the partners to be
included in the partnership.
b) It ought to have;

 The name of that partnership Nature of business

Proposed registered office

Personal particulars of aspiring partners

Particulars of corporate if partners are corporate
Particulars of the would be manager or corporate
It takes 9-14days to process the statement at a fee of
KES 10,000
d) ISSUING CERTIFICATE OF REGISTRATION
e) DRAFTING OF THE PARTNERSHIP AGREEMENT
a) Seek lawyers advice (optional) at a negotiated fee
b) It describes Mutual rights and duties between partners.

CONCLUSION