Being sued is every partnership's nightmare, but there's a novel way to limit your liability
All partnerships should consider the likelihood of receiving a claim that could bankrupt the business and all the partners. Insurance can cover most risks, but the amount or type of cover may not extend far enough.

The Limited Liability Partnerships Act 2000 offers partners an alternative to incorporating into a limited company as a means of capping their liability.

The most important question to ask is whether you could lose your home in an Armageddon situation. Under the Partnership Act 1890, partners are jointly and severally liable for the partnership's debts. The advantage of an LLP is that the liability of the partners is limited principally to their capital contribution to the business.

Limited liability may appeal to existing partners as well new recruits wanting to avoid the financial risks of an unlimited liability partnership. That said, all the partners within an LLP should recognise that an individual partner may still be sued personally if it can be proved that he or she was negligent and held a personal duty of care.

Many partnerships have shied away from incorporation because of the high cost of national insurance contributions for directors. The LLP route has the benefit of limited liability, with its members continuing to be taxed as partners – as self-employed, rather than as employees.

Tax issues aside, the incorporation of an LLP is a similar process to that of a limited company. It is wise to consider related issues that affect third parties including landlords, banks and suppliers, who may continue to insist on the security afforded by the unlimited liability of partners.

A possible downside of incorporating as an LLP is the greater disclosure of business accounts. As a partnership, there is no legal requirement to disclose accounts to the outside world (other than to the Inland Revenue). As an LLP, there is a requirement to publish annual accounts that are available for public inspection.

Although there are financial costs to limiting liability, including annual accounting costs, existing partnerships must consider the alternatives as well as focusing on the possible costs of not converting.