The Better Option?

An Appraisal of Limited Liability Partnerships Vis-à-vis Other Forms

of Partnerships in Kenya

By

Justus Omollo†

5th March, 2015

† Bar Candidate, Kenya School of Law & Legal Assistant Prof. Albert Mumma & Co
Introduction

The legal regime on partnership business in Kenya has been governed by the

Partnership Act Cap 29 of the Laws of Kenya (repealed by the Partnerships Act NO. 16

of 2012 1 ), Limited Partnership Act, Cap 30 of the Laws of Kenya 2 and the recently

enacted Limited Liability Partnership Act No. 42 of 2011 as well as the Partnerships Act

No. 16 of 2012. The Limited Liability Act that began its operation on 16th March 2012 has

been poised to have injected a new hybrid method of doing business in Kenya. The new

form of business association is known as limited liability partnership. The following

discourse gives an in depth appraisal of the concept of limited liability partnership

entrenched under the Limited Liability Partnership Act. Additionally, the discourse also

juxtaposes the limited liability partnership with other forms of partnerships. The other

forms of partnerships recognized under Kenyan law include general partnerships and

limited partnerships. 3 The concept of limited liability partnership revolutionizes the

practice of business in Kenya and has a package for improving partnerships in

professional business.

The limited liability partnership combines some of the features of a traditional

partnership with the limited liability benefits more typically associated with a company.

The salient features of the limited liability partnership are manifest in the following and

are discussed in detail hereunder:

1) Registration of the limited liability partnership.

1 See section 77, Partnerships Act, No. 16 of 2012.

2 It has however been repealed by the Limited Liability Partnerships Act. Section 37 of LLP Act expressly
stipulates the repeal of Cap 30.
3 See the Partnerships Act no. 16 of 2012.

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 2) Powers of a limited liability partnership.

3) Power to form a limited liability partnership.

4) Separate legal personality from the members.

5) Perpetual succession.

6) Liability under limited liability partnerships.

7) Management of a limited liability partnership; stipulations for a Manager

8) Conversion of partnerships and limited liability companies to limited liability

partnership.

9) Assignment of rights

10) Insolvency and winding up of limited liability partnerships.

11) Cessation from Partnership

12) Regulation of relationship of the partners

13) Agency relationship between partners and the limited liability partnership.

14) Implication on taxation.

1) Registration of the limited liability partnership.

Section 2 of the Limited Liability Partnership Act defines a Limited Liability Partnership

is defined as a partnership registered under the Act.4 The LLP Act stipulates that a

statement must be lodged with the Registrar of limited liability partnerships, which

must be signed by each of the persons proposing to be a partner. Notably, the Act

allows formation of partnerships by both natural persons and body corporate.5 The Act

provides that limited liability partnerships shall be formed by an agreement, with the

4 Per section 2(1), LLP Act.

5 See section 17, LLP Act.
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requirements being two or more persons. The two can be companies, two individuals or

a company and an individual, and such options are not usually available for ordinary

partnerships. In case the partners are natural persons, the statement for registration

must set out details on the name of that partnership; the general nature of the proposed

business of that partnership; the proposed registered office of that partnership; the

name, identity document (if any), nationality, and usual place of residence of each

person who will be a partner. In case the proposed partner is a body corporate the

following details will be furnished for the purpose of identity: the body's corporate

name; the body's place of incorporation or registration; the body's registration number

(if any); and the registered office of the body to which all communications may be

addressed.

Another unique feature in connection to a registered limited liability partnership is set

out in section 20 of the LLP Act which provides the name of a limited liability

partnership must end with the expression “limited liability partnership” or the

abbreviation “llp” or “LLP”. In comparison to the provisions of the provisions of the

Partnerships Act No 16 of 2012, the name of a limited partnership is required to have

the words “limited partnership” or the abbreviation “lp” or “LP”.6

Under section 21 of the LLP Act, limited liability partnerships can change their names

but only with the permission of the Registrar.

6 See section 65(1), Partnerships Act No. 16 of 2012.

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When the Registrar is satisfied that all requirements have been met, he or she would

then register the statements; and issue a certificate of registration to the persons who

lodged the statement. The certificate bears the name of the partnership and is conclusive

evidence of full compliance with the requirements.

2) Capacity to form a limited liability partnership.

A limited liability partnership is required to have at least two partners.7 Under section 9

of the Limited Liability Partnership Act both natural persons and juridical persons have

the capacity to form a limited liability partnership. This is advantageous where several

businesses wish to form a business consortium for a particular transaction. They can

form a limited liability partnership with each member of the consortium taking up a

share as a partner. Thus, the complications of joint ventures are avoided with limited

liability partnerships. However, a trade union is not regarded as body corporate for the

purpose of formation of a limited liability partnership.

A limited liability partnership can only be formed if it has one or more general partners,

each of whom has unlimited liability; and one or more limited partners, each of whom

has limited liability. 8 A general partner is liable for all debts and obligations of the

partnership whereas a limited partner is liable for the debts or obligations of the

partnership to the extent of the amount contributed to the partnership at the time of

joining the partnership.

7 Section 26(1), LLP Act.

8 Section 56, Partnerships Act No. 16 of 2012.
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 3) Powers of a limited liability partnership

a) Separate legal personality from the members/

Upon registration, a limited liability partnership would be clothed with the legal

capacities of a body corporate.9 Separate legal personality implies that limited liability

partnerships would have legal entity distinct from its members, and capable of enjoying

rights as well as being subjected to obligations which are not the same as those enjoyed

or borne by the members. A limited liability partnership can in its own name and seal

sue and be sued. In the same regard, limited liability partnerships can acquire, own,

hold and develop or dispose of movable and immovable property.10 The property of the

limited liability partnership is thus distinguishable from the property of the members.

Additionally, the debts incurred by a limited liability partnership would be paid out of

the assets of the limited liability partnership and not from the assets of individual

partners save for specific cases where a partner would be personally liable for acts or

omissions that do not bind the partnership.

b) Perpetual succession.

Apart from acquiring legal personality upon registration, a limited liability partnership

also becomes a body corporate with perpetual succession. 11 It is also entrenched in

section 6(3) of the Act that a change in the partners of a limited liability partnership

does not affect the existence, rights or obligations of the limited liability partnership.

The foregoing observation is the underlying principle of perpetual succession. The

9 See Section 6(2), LLP Act.

10 Section 7(1), LLP Act.
11 Section 6(2), LLP Act.

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concept of perpetual succession also follows that the limited liability partnership can

only cease to exist by the same process of law which brought it into existence. A limited

liability partnership is not subject to the death of any of the partners hence even though

the partners may come and go the partnership would continue to exist.12

It is notable under section 8 of the Limited Liability Partnership Act acknowledges

application of the Partnerships Act to a limited liability partnership except where

otherwise expressly provided by the LLP Act.

The concept of perpetual succession in a limited liability partnership is a departure

from the nature of ordinary partnerships. Under an ordinary partnership envisaged in

the Partnerships Act a partnership is automatically dissolved upon the departure of any

of the partners, while the in case of LLPs there shall be continuity in the business.

4) Electronic lodgement of documents with the Registrar

The LLP Act provides for electronic lodgement of documents with the Registrar.13 In

practice, the Registrar of Limited Liability Partnerships doubles up as the Registrar of

Companies hence the provision on electronic lodgement will save time and costs for the

partners.

Other partnerships have no provision allowing electronic lodgement of documents with

the Registrar.

12 An exception however lies in situation where the number of partners falls below two. The partnership

would then be wound up; See the Fifth Schedule of LLP Act, section 3(1)b.
13 Section 5, LLP Act.

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 5) Liability under limited liability partnerships.

A limited liability partnership differs from the ordinary partnership under which the

partners are liable personally for all debts and obligations of the partnership. In

contrast, under a limited liability partnership the partners are not liable in any

obligation under a contract and tort and otherwise except to a certain extent.14 This is

because a limited liability partnership enjoys the status of a juridical person.

The Limited Liability Partnership Act does not waive liability for tortuous acts arising

from individual partner’s action or omission. However, one partner in a limited liability

partnership setup is not liable for wrongful acts or omissions of another partner within

the limited liability partnership.

Additionally, a limited liability partnership would be responsible for a wrongful act or

omission committed by a partner to another person (other than a partner of the limited

liability partnership) in the course of the business of the limited liability partnership or

with its authority a person.

However, under the Partnership Act, Cap 29 every partner is liable jointly with his co-

partners and also severally for everything done in the firm, while he is a partner

therein.15 The same provision is mirrored in the Partnerships Act No. 16 of 2012 which

provides that each partner in a general partnership shall have unlimited liability.16

A distinction is made when it comes to limited partnerships which consist of a general

partner and a limited partner. A general partner is liable for all debts and obligations of

14 See section 10, LLP Act.

15 See section 11 , 14, 15 & 16, Cap 29.
16 See section 4 and 22, Partnerships Act No. 16 of 2012.
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the partnership whereas a limited partner is liable for the debts or obligations of the

partnership to the extent of the amount contributed the partnership at the time of

joining the partnership.17

6) Management of a limited liability partnership; stipulations for a

Manager

A limited liability partnership must have at least one manager who must be a natural

person, attained the age of eighteen years and is a resident in Kenya.18 The particulars

and consent to act as the manager(s) must be lodged with the registrar in the prescribed

form. The role of a manager is to ensure that the limited liability partnership lodges

annual declaration of solvency or insolvency, file changes in registered office of the

limited liability partnership and ensure that invoices or other documents issued relating

to the partnership business bears: the name and registration number of the partnership;

and a statement that it is registered with limited liability.

If a limited liability partnership fails to comply with the requirement for a manager, the

partnership and each of the partners shall have committed an offence and shall be liable

on conviction to a fine not exceeding one hundred thousand shillings.

7) Conversion of partnerships and limited liability companies to limited

liability partnership.

The limited liability partnerships structure provides a potentially useful alternative

channel for business compared to the partnerships and limited liability companies. At

17 Section 56, Partnerships Act No. 16 of 2012.

18 Section 27(1), LLP Act.
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the moment, it has the benefit of being less regulated. The feature under the Limited

Liability Partnerships Act which prescribes mechanisms to convert existing

partnerships and private companies into limited liability partnerships is unique.19 This

move by the draftsmen is indicative that the government is interested in encouraging

the use of limited liability partnerships, especially for small to medium size enterprises,

which would ordinarily use the other types of business association.

Notably, such conversion does not terminate rights and obligations which subsisted

immediately before the conversion. The rights and obligations are transferred by

operation of law to the new limited liability partnership.

8) Assignment of interests

It is noteworthy that a partner can assign whole or any part of his interest in the limited

liability partnership to another person not necessarily being a partner.20 This provision

is useful especially in circumstances where there are only two partners and there is a

stalemate in the management of the business to force out one partner. Although the

assignment terminates the assigning partner’s rights in the limited liability partnership,

the assignee would be entitled to participate in the management of the business.21

The provision for assignment of interests connotes that anyone may become a member

of the limited liability partnership and thereupon participates in its management affairs.

19 See section 24 and 25, LLP Act.

20 Section 15(2), LLP Act.
21 See section 15(3), LLP Act.
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Assignment of interests can be excluded if expressly stated in the Limited Liability

Partnership Agreement.

However, in a general partnership envisaged by the Partnerships Act no. 16 of 2012, the

assignee is not entitled to participate in the management or administration of the

partnership business or affairs or even inspect the partnership records.22 The assignee

can only replace the assignor upon the agreement of all other partners.

9) Insolvency of limited liability partnerships and partners

If a limited liability partnership becomes insolvent, it would be brought under

receivership.23 The Fourth Schedule sets out provisions on the appointment of a receiver

or manager in respect of the partnership and the conduct of the receivership or

management of the affairs of the partnership. It would be applicable in the

circumstances of insolvency of the limited liability partnership. The limited liability

partnership is required to lodge an annual declaration of solvency or insolvency with

the Registrar.24 The declaration is lodged by one of the managers of the limited liability

partnership stating as at that date that the partnership either appears to be solvent or

does not appear to be solvent.

With regard to bankruptcy of a partner, it does not cause such a partner to cease being a

partner in the limited liability partnership. 25 Nevertheless, such a partner may not

participate in the management of the limited liability partnership. In contrast, a

22 Section 34(1), Partnerships Act No. 16 of 2012.

23 See section 34, LLP Act.
24 Section 29, LLP Act.
25 Section 14(2), LLP Act.
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partnership formed under Partnership Act Cap 29 would be dissolved if any of the

partners becomes bankrupt.26

The 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.27

10) Cessation from Partnership

A partner in a limited liability partnership may cease to be a partner in the following

circumstances:28

a) In compliance with the provisions of a Limited Liability Partnership Agreement;

or

b) Issuance of not less than 90 days’ notice to the other partners of the limited

liability partnership of the intention to resign; or

c) Upon death of that partner or on dissolution of the partnership.

The Limited Liability Partnership Act also protects the interest of resigning partners or

their beneficiaries (upon death). In this regard, on resignation or upon death, that

partner or his personal representatives or assigns is entitled to receive from the limited

liability partnership an amount equal to the person’s capital contribution to the limited

liability partnership and the person’s right to share in the accumulated profits of the

limited liability partnership after the deduction of losses of the limited liability

26 Section 37(1), Cap 29.

27 Section 14(3), LLP Act.
28 Section 13(1), LLP Act.
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partnership.29 The amount is to be determined as at the date the person ceased to be a

partner. The foregoing provision is also mirrored in section 46 of the Partnership Act

Cap 29.

Under the Partnerships Act No. 16 of 2012, a person can also cease to be a partner in a

partnership when he is expelled as a partner by his co-partners; or when the Court

makes an order under section to remove the person as a partner; or when a bankruptcy

order or an award for sequestration is made against the person.30

11) Regulation of relationship of the partners

Under the Limited Liability Partnerships Act, the relationship of the partners

themselves and the relationship between the partners and the limited liability

partnership are governed by the Limited Liability Partnership Agreement. In the

absence of such an agreement, the First Schedule of Act which sets out provisions

regarding governance and management of limited liability partnerships would apply.

Decisions of the limited liability partnership are to be made through resolutions passed

with the requisite quorum as may be stipulated in the Limited Liability Partnership

Agreement.31

The Partnership Agreement under Partnership Act served to regulate the relationship of

the partners. A willful and persistent breach of the Partnership Agreement would

warrant the partnership to be dissolved by the court on application by a partner.32

29 Section 13(3), LLP Act.

30 Section 27, Partnerships Act No. 16 of 2012.
31 See section 12, LLP Act.
32 Section 39, Cap 29.
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Under the Partnerships Act No. 16 of 2012, the Partnership Agreement33 can provide for

continuity of the partnership business despite a change in the partners. The Agreement

sets out the rights and obligations of partnership and the partners. Under section 44, the

court can make an order removing a partner or breaking the partnership if there is

breach of the terms of the Partnership Agreement.

12) Agency relationship between partners and the limited liability

partnership.

Partners of a limited liability partnership are agents of a limited liability partnership.

The agency is exercised within the confines of agency law and can be repudiated in

circumstances where: the partner in question acted without authority of the limited

liability partnership; or the person dealing with the partner knows that that partner has

no authority but proceeds to transact with such partner.

Under section 33 of Limited Liability Partnership Act, whenever a change occurs in any

of the details registered in respect of a limited liability partnership, the same should be

lodged with the Registrar within fourteen days after the change in form of a statement

specifying the nature and effective date of the change and such other information as

may be prescribed by the regulations.

The Partnerships Act No. 16 of 2012 also expressly provides that each partner shall be

an agent of the partnership for the purpose of the business of the partnership. 34

Furthermore, a partnership would be bound by an act done by a partner who is

33 It is defined under section 2 as an agreement between, persons carrying on business in common with a

view to making a profit.

34 Section 7(3), Partnerships Act No. 16 of 2012.

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carrying on the business of the partnership except where the partner has no authority to

act on behalf of the partnership or the person with whom the partner is dealing has

notice that the partner does not have authority to act on behalf of the partnership.35

13) Implication on taxation.

From the tax perspective, limited liability partnerships may prove to be effective

because presently the partnership income is taxed in the hands of the individual

partners and not at the firm level. It is not yet settled whether the government would

propose taxing the limited liability partnerships just like companies36 at firm level given

that the limited liability partnerships also possess separate legal personality. In some

other jurisdictions that have introduced limited liability partnerships, such as the

United Kingdom, India and the United States of America, the limited liability

partnerships have generally been treated as an avenue to reduce expenditure on tax.

This has made the limited liability partnerships more appealing to the investors. As

long as Kenyan income tax laws are not amended to impose a tax on the limited liability

partnerships at firm level, then the limited liability partnerships will also provide an

excellent alternative channel for doing business compared to general partnerships. This

is notably because the limited liability partnerships will not only provide the same

benefits under taxation as a general partnership, but also offer limited liability to the

partners similar to that offered by a company to its shareholders.

35 Section 17, Partnerships Act No. 16 of 2012.

36 Companies are taxed at the entity level and any dividends also taxed in the hands of shareholders.

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Conclusion

Limited liability partnerships have several advantages over other forms of partnerships.

It is a hybrid of partnership and company structure. Accordingly, partners in limited

liability partnerships will reap the benefits of limited liability which assures protection

of their personal assets from any potential business creditors.

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 References

 Limited Liability Partnership Act No. 42 of 2011.

 Partnership Act, Cap 29 of Laws of Kenya
 Partnerships Act No. 16 of 2012, Available at:

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