LLP conversion - what we know now |
Gerry Murphy, Head of professional practices at Deloitte
The rapid take up of LLP status is set to continue - with risk management undoubtedly the driving force. Although it is recognised that LLP status only offers protection as a last resort, the conversion process itself can offer risk management insights and benefits.
Converting to an LLP involves transferring every asset, liability, contract and business process of the firm from one legal entity to another. It therefore requires firms to establish a clear understanding of their existing operations. Undertaking this ‘due diligence’ will often highlight issues of which management are not aware and the process thereby encourages a reassessment of existing processes.
Careful consideration of the level of protection conferred by LLP status also draws into focus the protection which limited liability does not provide. LLP only offers protection in an Armageddon scenario. Considering this, firm’s management may decide to spend time addressing other areas of risk management. This could include policies around formal agreement of engagement scope, liability capping on client engagements and updating client acceptance procedures and quality review processes.
When making the decision to convert to LLP, firms are faced with weighing up the risk management benefits versus the costs of conversion. The level of costs will depend on whether the firm undertakes the legal work in-house, or enlists the help of an external specialist who has experience of other conversions. Other costs such as re-branding will be dependent on whether the firm incorporates LLP on its logo, and the cost of accounting advice will depend on whether the firm already prepares accounts in accordance with generally accepted accounting standards and whether they are audited. The most significant ‘cost’ is likely to be the internal time costs spent on the project. However some of this will inevitably relate to improved housekeeping, which the firm should be performing in any event. If these matters are already in good order then the incremental costs of conversion to LLP status are much reduced.
All firms will want to minimise the level of disruption to clients and staff. If the firm intends to formally notify clients that they are now engaging the LLP, the firm must factor into its planning the amount of fee earner downtime involved in co-ordinating the process.
Identifying the management resource required is only one area where detailed advance planning can pay dividends. Planning should include mapping out the timetable with the order of events and communications and identifying which tasks are required for the completion of others. Identifying potential pitfalls and issues at an early stage enables the firm to communicate them and obtain partner buy-in to the proposed solutions before advancing too far down a path.
A strict interpretation of the stamp tax exemption (available on the transfer of assets to an LLP) requires the signature of every partner to subscribe to the LLP membership. There is the possibility that a minority group of partners might disrupt the process by using their agreement as a bargaining tool to advance their own agenda. Careful consideration of the procedures for ensuring full partner support and clear communication to partners will facilitate a balanced discussion of all the issues and the costs and benefits of the decision.
With a view to minimising the future costs of conversion, there are action points which could be considered now by all firms contemplating LLP status. Firms should ensure that any new contracts entered into (especially property leases) include a clause for automatic transfer to an LLP; that the partnership deed is up to date and is comprehensive on issues such as the ability to bind a minority, and whether any planned re-branding exercises would be best deferred to coincide with conversion.
The younger generation of partners now seem to be expecting limited liability protection as a matter of good housekeeping and, if that trend continues, then firms may find themselves having to convert sooner rather than later if they are to attract and retain the best talent. Whilst careful consideration should be taken by a firm before making the decision to convert, taking into account the costs, planning requirements and limitations of the protection LLPs offer, the conversion process itself provides an opportunity to thoroughly review the firm’s risk management.