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Damage limitation

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New legislation on limited liability will be a boon for many architects' practices. But the drawbacks must be considered

If you work for a company and one of your colleagues makes a major error resulting in a claim for professional negligence against the organisation, you do not have to worry that your own personal assets will be called in to pay the damages. This is a luxury not afforded to most architects, who usually work in a practice rather than in a company structure, meaning the malpractice or professional negligence of a partner or employee can have devastating personal effects.

For those working in small architectural firms where everyone knows what everyone else is doing and can hope to spot the warning signs of a disaster before it happens, these fears may be less real. But where architects are employed in large firms it can be hard to have any control over what is going on. The limited liability partnership (LLP) structure introduced last year has arisen out of these concerns.

An LLP is a hybrid between a limited company and a partnership. For the first time the law will allow architects, in common with other partnerships, to benefit from limited liability status while enabling them to continue running their internal affairs as before.

Aside from fears of the consequences of the negligence of a partner or employee, another reason for looking at LLP status is the protection it can give to personal assets against avaricious creditors in the event of business failure. Every architectural practice should look seriously at converting to LLP status.

Another attraction is that the LLP is a separate legal entity, distinct from its members. It can hold property and enter into contracts in its own name.

It also has unlimited capacity. Those architects who find endless practice paperwork a distraction from getting on with client work will be delighted to learn that the LLP's corporate status does away with the need to circulate papers to every partner for signature.

Ofcourse, nothing is perfect and LLP status may have some drawbacks.One is the contentious requirement that an LLP produces audited accounts and files them at Companies House. The reason for this is so that creditors know the worth of the LLP.At present, unincorporated partnerships, such as architects' practices, have no statutory requirement even to produce audited accounts, and many have been notoriously secretive.

However, problems may be caused by LLP practices having to include in their accounts, hitherto unprovided, for contingent liabilities, such as retirement annuities.

A contentious issue regarding LLP status is the extent to which a negligent partner could still be at risk from personal liability for negligence. A potential claim against an individual could still exist in tort rather than contract law. This would happen in the same way as where an individual company director is held personally liable if they assume a personal responsibility for their advice over and above that given in their role as a director of the company. Here LLP status will not be a substitute for adequate professional indemnity insurance.

Equally, architects lured by the prospect of lower corporation tax rates will be disappointed. The Inland Revenue fears that the LLP may be used as a sophisticated tax-avoidance device, and is setting up anti-tax avoidance legislation accordingly. An LLP's profits will be taxed as if the business were carried on by architects in partnership, so the commercial choice between using an LLP or a partnership is tax-neutral.

On the whole, the LLP is going to be attractive to professional partnerships. New recruits to architectural firms, or architects seeking partnership status, are more likely to be attracted to an LLP than to an unincorporated partnership, with its attendant personal financial risks.

Preparation for LLP status needs careful thought. Although the incorporation procedure itself is simple, moving the existing business into the LLP needs detailed planning. Things to consider are whether your bank manager will be happy with a change in the structure. They may want a charge over the assets of the LLP or personal guarantees. Your landlord may need persuading to agree to assign your lease to a company, thereby giving up the partners' personal covenants. You will need to explain to your clients why your are changing your legal structure.

Finally, there are accountancy issues to be considered: will you be worse off as a result of incorporating under the LLP and, if so, is this a shortterm or long-term problem? The answer to this final point will possibly be the ultimate arbiter of whether or not to choose LLP status.

Annette Whybrow is a partner of Birketts Solicitors, 22-24 Museum Street, Ipswich, tel 01473 232 300, e-mail annette-whybrow@birketts. co. uk

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