Limited Partnerships and Limited Liability Partnerships

Ordinary partners risk everything they own. The law therefore offers two ways of keeping the partnership form while limiting a partner’s risk. In a limited partnership, some partners invest without managing and risk only their investment. In a limited liability partnership, the firm itself is a legal person and the partners are protected from the firm’s debts.

Both are regulated by Companies and Allied Matters Act 2020 (CAMA 2020): limited partnerships by Part D and limited liability partnerships by Part C. Examiners ask for their features and the differences between them and a general partnership.

Limited partnership

In a limited partnership, one or more members choose limited liability so that they can invest without taking part in management. The partnership must be created formally by a written agreement under seal. All other partnerships can be created informally. Part D of CAMA (sections 795 to 801), together with state laws that are consistent with it, governs it.

Limited liability partnership (LLP)

The Lagos State law of 2009 was the first to provide for LLPs. For the federal level, Part C of CAMA (sections 746 to 794) governs them. Two or more persons who intend to carry on business for profit subscribe to and file incorporation documents with the Corporate Affairs Commission and pay the prescribed fee.

The documents state the name of the limited liability partnership (LLP), its proposed business, the address of its registered office, the name and address of each partner, the designated partners and any other information the Commission requires.

Nature of an LLP

• It is a body corporate and a separate legal entity from its partners, with perpetual succession, so a change of members does not affect its existence, rights or liabilities.
• It needs at least two partners and two designated partners, and the same two people can be both. Where all partners are bodies corporate, at least two of their nominees, or two individual partners, act as designated partners. One designated partner must live in Nigeria.
• Its name must end with ‘limited liability partnership’ or ‘LLP’.
• It may sue and be sued in its own name, own and dispose of property, have a common seal if it wishes, and do what a body corporate may do. A body corporate may be a partner.
• If it carries on business with fewer than two partners for more than six months, the one partner who knows is liable for all its debts.

Designated partners

A designated partner must consent to the role. He is responsible for every act that CAMA requires the LLP to do, including filing documents and returns, and is liable for the penalties the Act imposes on the LLP for non-compliance. He ceases to be a designated partner if he ceases to be a partner.

A written agreement made before incorporation can bind the LLP if all partners ratify it after incorporation. Without an agreement, the Fifteenth Schedule to CAMA governs the partners’ relationship.

Liability and agency

• The LLP is not liable for an act of a partner who has no authority, if the third party knows it or does not believe he is a partner.
• If a partner commits a wrong in the course of the firm’s business or with its authority, the LLP bears the liability, which is met from its property, not the partners’ own.
• Liability becomes unlimited for the LLP and the partners who acted if the firm acted with intent to defraud creditors or for any fraudulent purpose.
• A partner is an agent of the LLP, but not of the other partners.
• A person who allows himself to be held out as a partner is liable to a third party who relied on it. The LLP is also liable if it received credit for the holding out.

Accounts, returns and investigation

An LLP must keep proper books on a cash or accrual basis by double entry at its registered office, prepare a statement of account and solvency within six months of the end of its financial year and file it with the Commission, and have its accounts audited as the Minister prescribes.

Annual returns must be filed within 60 days after the end of the financial year, or penalties apply to the LLP and the designated partners.

The Commission may investigate an LLP on a court order, on the application of one-fifth of its members or of the firm itself, or if it believes the firm is being run to defraud or unlawfully, is not complying with CAMA, or should be investigated after a report from another agency. Applications need credible evidence and may require security.

A foreign LLP may incorporate in Nigeria and cannot carry on business here otherwise.

Leaving, and winding up

A member leaves as agreed, or, if nothing is agreed, by giving at least 30 days’ written notice. Membership ends on death, on dissolution, if declared of unsound mind, or if declared insolvent. A departing partner or his estate is entitled to his capital contribution plus a share of accumulated profits less accumulated losses to the date of leaving, but may not interfere in management. Leaving does not cancel obligations already owed.

An LLP may be wound up voluntarily or by the court.

The court may order winding up when all the partners agree, when the number of partners has been below two for more than six months, when the LLP cannot pay its debts, when it has acted against the sovereignty, integrity or security of Nigeria or public order, when it has failed for ten consecutive financial years to file its statement of account and solvency, or when the court thinks it just and equitable.

The three forms compared

Worked example: choosing and applying

1. Form. A limited partnership suits her, with Dayo and Femi as general partners and Kemi as a limited partner whose liability is capped at ₦5 million.
2. Test her conduct. A limited partner who takes part in management is liable for all debts as though she were a general partner. Choosing the menu and signing orders is management.
3. Conclude. Kemi risks losing her protection and being liable for the whole ₦8 million. She should have limited herself to advising and inspecting the books.

Limited partnerships and LLPs in more detail

Why the limited partner may not manage

A limited partner has capped liability because he is an investor and not a decision-maker. If he takes part in management, third parties may deal with him as though he were a general partner, so the law makes him liable for all debts for that period. He may still give advice and inspect the books, which are normal investor rights.

The line is between watching over an investment and running the business.

Two calculations

The cap. Bello is a limited partner who contributed ₦2,000,000. The firm fails owing ₦9,000,000, and its assets realise ₦3,000,000. The shortfall is ₦6,000,000. Bello’s liability is limited to his ₦2,000,000 contribution, which is already part of the firm’s assets, so he owes nothing more. The general partners are liable without limit for the whole shortfall of ₦6,000,000.

A withdrawal. If Bello had taken back ₦500,000 of his contribution during the partnership without written agreement, he would be liable for the firm’s debts up to ₦500,000 more, so his total exposure is the ₦1,500,000 still invested plus the ₦500,000 he withdrew, which is ₦2,000,000.

Forming an LLP, step by step

1. Two or more people intending to carry on business for profit agree to form an LLP.
2. They subscribe to the incorporation documents, stating the name, the proposed business, the registered office, the names and addresses of the partners and the names of at least two designated partners.
3. They file the documents with the Corporate Affairs Commission and pay the prescribed fee.
4. The LLP comes into being as a body corporate. If the partners made an agreement beforehand, it binds the LLP only if all the partners ratify it afterwards. Without an agreement, the Fifteenth Schedule governs their relationship.

Designated partners and compliance

The designated partners are the LLP’s compliance officers. They must see that the LLP files what CAMA requires and are personally liable to the penalties the Act imposes for default. At least one must live in Nigeria so that the Commission always has someone within reach.

Liability: three situations

LLP compared with a company and with a general partnership

Investigation and winding up

The Commission may investigate an LLP on a court order, or itself on an application by one-fifth of the members or by the firm, or if it believes that the firm is defrauding creditors, breaking CAMA, or should be investigated after a report from another agency. An applicant must give credible evidence and may have to give security. Inspectors must be individuals, not firms or bodies corporate.

An LLP can be wound up voluntarily or by the court, on the grounds listed in the main notes.

Using the limited partnership and the LLP in answers

A limited partner’s rights and what he may safely do

A limited partner may inspect the books and examine the state and prospects of the business, give advice, and receive his share of profits. He may not draw out his contribution during the partnership without written agreement of the partners, and he must not take part in the management.

Voting on whether to admit a new limited partner, or consenting to a change in the nature of the business, is generally treated as an exercise of investors’ rights and not management, but acting for the firm or signing contracts in its name is management.

When a limited partnership is wound up, who gets what?

Assets are applied as in any partnership: first to outside creditors, then to partners who are lenders, then to capital, with any surplus shared in the profit ratio. A limited partner’s loss is capped at his contribution, so the general partners bear the rest of any deficiency personally.

Choosing between an LP and an LLP

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying a limited partnership is a legal person. Only an LLP is.
• Forgetting that a limited partner who manages loses protection.
• Confusing the Part of CAMA. Limited partnerships are Part D. LLPs are Part C.
• Forgetting the requirement of two designated partners, one resident in Nigeria.
• Saying LLP partners are never personally liable. They are liable for their own fraud.
• Mixing up the name endings, ‘LP’ and ‘LLP’.

Quick revision

• LP: Part D, up to 20 members, general and limited partners, name ends LP, deed under seal.
• LLP: Part C, body corporate, perpetual succession, two partners and two designated partners, one resident in Nigeria, name ends LLP.
• LLP liability: the firm bears it, unlimited where there is fraud.
• LLP duties: accounts and solvency statement in six months, annual returns in 60 days.
• LLP winding up: voluntary or by the court on six grounds.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer.

Section A style: multiple choice

Section B style: written questions

A further written question

Model answers

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