Government suggestion to outlaw corporate directors of LLPs

In July 2013 the Government published a discussion paper on transparency and accountability in business transactions. Among a wide range of issues the question of corporate directorships was discussed.

In April 2014, the Government’s response to the consultation was published. This included the following in relation to the use of corporate directors:

On balance, we want to ensure – and send a signal – that for the majority of UK companies appointing a company (or legal person) as a director is not an option.  Directors should normally be individuals (natural persons). We have therefore decided to pursue a default prohibition of corporate directors, whilst additionally providing for limited exemptions to that prohibition. Most companies will not be able to appoint a corporate director. But a company will be able to continue to use or to appoint a new corporate director if it is within scope of the exemptions. We can see a case for consistency and the inclusion of LLPs in this system, alongside companies, and welcome views on this point.

The limited exemptions that are currently being considered would apply to:

  • Group structures including large listed companies
  • Group structures including large private companies
  • Charities
  • OEICs (where they are licensed by the FCA)

The suggestion that corporate partners of LLPs should only be allowed in the most limited of circumstances would have a wide impact. Not only would this end the use of mixed membership LLPs, which are already subject to anti avoidance provisions for income tax purposes, but it would also have an impact on genuine commercial arrangements where companies are members of LLPs. This is a well-used structure for property transactions as well as other commercial arrangements.

These proposals do not affect partnerships formed under the Partnership Act 1890 or the Limited Partnership Act 1905. However, these structures do not provide the  level of protection in terms of limitation of liability that is inherent in an LLP structure.

This means that whenever planning involves the use of LLPs, advisers need to bear in mind these potential changes.

If you require any further information on corporate members of LLPs please ring the TaxDesk on 0845 4900 509 and ask for Paul Howard.