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Governed by 2 laws: Partnerships Act and the Limited Liability Partnerships Act, both of
2012.
Definition - A business where two or more people carry out business jointly with a view
to profit.
READ: Why are all investment groups (chamas) not considered as partnerships?
- Body corporates
- Forms of organisations where members are less than two eg sole traders
Formation of partnerships
- Types of partnerships
Types of partnerships
Previously there were Commonwealth partnerships and the East African Community
Partnerships. However, both were repealed. Currently those partnerships not registered
in Kenya have a window under foreign partnerships.
a) Fiduciary duties
b) Disclosure duties
c) Diligence duties
Fiduciary duties
b) duty of disclosure
- The obligation is on material information, the standard being that the information must
be likely to influence the partners at the time of forming the partnership or the
continuance of the partnership.
- Where a partnership exists, the partners must disclose any information to the
prospective partners which may influence their decision to join the partnership.
- The prospective partner also has an obligation to disclose to existing partners any
information he believes will influence their decision to admit him as a partner.
- Partners have an obligation to express any information which will impact the
continuance of the partnership.
- The three obligations on disclosure are: the obligation is discharged only if the
disclosure is complete in all material respects; the obligation is discharged if disclosure
is made as soon as reasonable; and further that the disclosure must be made to all
partners.
c) Duty of diligence
- All partners are required to be engaged equally in the business of the partnership,
unless a contrary provision is made under the partnership agreement.
- Similarly, general partners in the limited partnership are required to engage in the
management and control of the partnership.
- Second, the partner must show skills and expertise required of you, first as an ordinary
partner objectively, and those required of a person of your skill and experience
subjectively.
- A partner must dedicate the required time in the business of the partnership.
- The obligations are owed between partners, as well as between the partner and the
partnership.
Partnership membership
A person ceases to be a partner on death, when adjudged bankrupt and not discharged
for three months, or on dissolution of a partnership. Other methods is by retirement or
resignation of a partner. One can also be expelled by fellow partners. Incapacity such
as mental infirmity can form a ground for expulsion. The court can also order the
removal of a partner.
Capital of the partnership
Partners have an obligation to contribute to the capital for the partnership business.
Where the agreement has not set the limits, the obligation is to contribute equally.
The Act requires approval for all partners where any additional contribution is required.
A partner who has extra contribution must also get the consent of all other partners.
A partnership can also receive loans or additional funds from its parters. The decision
on whether to borrow from partners is an ordinary business which can be approved by a
simple majority. Any loan given to the partnership can only attract a 3% interest (hinders
partners from taking advantage of the partnership or other partners to loan money at
excessive rates).
All partners are entitled to engage in the business of the partnership diligently at all
times. Further, partners are deemed agents of the partnership, with powers to contract
and give undertakings and enter into obligations binding the partnership.
Partners are at liberty to specify the manner and procedures of control in the
agreement. For instance, the agreement can provide:
A number of matters require unanimous decision of all partners. They are not limited to:
In default, the rest of decisions are taken by majority. There is no provision in the Act to
differentiate the voting rights on the basis of capital contribution – the principle is one
vote per partner.
Partners therefore have powers to bind the partnership and other partners under the
following conditions:
b) In the absence of powers, the person with whom they are contracting must have no
notice that they lack the power
The partner who has entered into a contract without authority is personally liable. The
third party is entitled to sue the partner who contracts without authority and recover the
price and damages.
Defined as any partnership registered under the LiimitedLiablity Partnership Act 2012.
2. The LLP has separate distinct legal personality with perpetual succession. It is fairly
stable as a formal business structure.
5. LLPs have lower compliance requirements – no need to file annual returns, circulate
statements, callAGMs like private companies.
Drawbacks to LLPs
4. Public bodies treat LLPs suspiciously – they tend to view the strength of the LLP
based on the strength of the individual partners as opposed to as a separate legal
entity.
5. Limited capital raising abilities of the LLP – if the partners take out loans, the liability
of the LLPs may exceed the capital contribution hence the business is often restricted to
trading within its capital contribution limit.
6. For certain professional firms, the government laws are hindrances, e.g. The legal
profession has restriction of sharing profits with non-qualified persons under the
Advocates Act.
For registration, the partners or the persons involved with the registration must file with
the Registrar a statement in the prescribed format. The statement must be
accompanied by the required documentation as provided in the Act. Further, an LLP
must be registerd by two or more persons.
Among the key requirements of the statements, the following details are required:
a) The proposed name of the LLP – the Registrar must satisfy himself that the name
has not been registered or is similar to those under the Companies Act, Registration of
Business Names Act or to those of public bodies, or is generally undesirable.
d) Particulars of capital
Where the registrar is satisfied, he registers the LLP and issues a Certificate of
Incorporation. The certificate is conclusive proof that the LLP has been duly registered
having complied with requirements of the Act.
Refusal of registrar
The registrar may refuse to register the LLP on own motion when:
The Registrar may decline registration if given a notice my the Cabinet Secretary
Interior that it is in the national interest that the LLP be not registered.
Nature of LLPs
LLPs are separate distinct legal personality from the partners. Liability of all partners is
limited, unlike in Limited Partnerships under the Partnerships Act, where the liability of
the general partner is unlimited.
In general partnership, the agency of the partnership is presumed unless the contrary is
proved. However, in LLP, only the general partners have presumed agency as a matter
of course (a partner cannot bind the partnership unless he proves he is a general
partner or is authorized to bind the partnership). Any claim or defence of any right must
be done in the name of the LLP.
Further, every LLP must have at least one natural person among the general partners
under the Act.
All general partners are to be engaged in the daily management of the LLP unless a
contrary provision is made.
Management and control of LLPs are governed by the LLP agreement. In the absence
of such LLP agreement, or in absence of provision of the specific act in management by
the agreement, the provisions of the first Schedule of the LLP Act apply.
- Parties
- Capital clause
The Act identifies two kinds – ordinary partnership to LLP, and private limited liability
company into LLP.
This is because the LLP merges the best features of both regimes.
- All existing partners must agree to be partners in the new LLP. A partnership going
though a breakup, winding up or dissolution cannot thus be converted.
Conversion is by filing the statement and accompanied documents with the registrar.
Upon registration, the LLP takes up the assets and liabilities of the partnership.
Public companies cannot convert to LLPs, only private limited liability companies can
convert.
The conversion must be supported by special resolution of the members of the
company.
Where the assets of the company have been attached under a debt instrument or other
encumbrance, the registrar will not agree to the conversion without prior consent of the
creditors or any receiver manager. The assets must be without encumberance.
There is no presumption of ownership. The property only becomes the LLP’s when it is
formally acquired or registered in the name of the LLP. Unlike ordinary partnership
where property can become partnership property when used by a partner in the ordinary
course of partnership business, there is no presumption of property under LLP.
KEY: The LLP Act states that the Partnership Act applies to LLPs unless excluded or
modified by the LLP Act itself. Therefore, the right and obligations of ordinary partners
apply also to LLPs.
KEY: there is no corporate veil in LLPs. There is also no cap on the number of partners
in LLPs.
READ: the LLP is not the bastion of good corporate governance. It is celebrated as an
efficient investment vehicle – it has fewer regulatory requirements with the protection of
limited liability and quick decision making by the fewer/single general partner(s). It
allows investors to take advantage of urgent business opportunities.
Unlike general partnerships, membership to the LLP does not terminate automatically
e.g. in cases of insanity, bankruptcy or death. Your representatives can take over your
rights and obligations, until other partners apply to court for an order of termination of
membership.
- By order of court – court can terminate membership in many instances, e.g. when a
receiving order in bankruptcy is made against a partner and is not discharged within 3
months.
e) Prepare and file an annual solvency report (minimum period between two reports
must not be more than 15 months) – this protects the non-general partners and the
creditors.
f) File any returns in the changes of the particulars in the LLP within 14 days – e.g.
where some partners enter and exit, change in the registered office, etc.
Further, the partners may agree by resolution to wind up/dissolve the LLP.
The Registrar may apply for winding up where the LLP is insolvent or where he deems it
desirable for the LLP to be dissolved.
Where an LLP is insolvent and faces liquidation, the Fifth Schedule apply.
KEY: Liquidation of an LLP must only be carried out by a licensed insolvency
practitioner, licensed under the Insolvency Act 2015