Will new transparency rules spell the end of corporate membership of LLPs?
Proposals to increase transparency and trust in the UK business environment are taking shape and are set to impact on LLPs following publication of the Government's response to its July 2013 consultation.
The principal proposal is the introduction of a central registry of beneficial ownership of UK companies and LLPs – but the response also floats a curious proposal to ban companies from membership of an LLP. This will apply to all UK companies and LLPs, other than quoted companies which comply with the significant shareholder regime under the Disclosure and Transparency Rules or equivalent disclosure requirements imposed by a regulated market. The Government is considering its application to other corporate bodies such as Scottish limited partnerships.
Individuals holding a significant beneficial interest in a UK company or LLP will have to notify the company. In addition to passing the information on to Companies House for inclusion in the central registry, public companies will be required to maintain their own register of beneficial owners.
Where a company or LLP knows or has reasonable cause to believe that there are other individuals who have not reported their beneficial ownership, it will have to make enquiries of those individuals and powers currently only available to public companies to require information about interests in their shares will be extended to private companies and LLPs.
An individual will be classed as a beneficial owner if he ultimately owns or controls more than 25% of a company or LLP’s shares or voting rights, or if he otherwise exercises control over the company or LLP or its management. The proposal does not deal with the difficulty of applying the concept of percentage ownership to the involved and messy arrangements that can apply to LLPs. If a beneficial interest is held through a trust, it is proposed that the individuals who control the activities of the trust should be recorded as beneficial owner. In most cases this will require only the trustees to be registered, but in some cases the beneficiary, settlor or protector of the trust might need to be registered.
Beneficial owners will be required to provide the following information: full name; date of birth; nationality; country or state of usual residence; residential and service address; and date on which the beneficial interest was acquired and details of the interest and how it is held.
Information on the central registry maintained by Companies House and information held on a company or LLP's own register of beneficial ownership will be publicly available, with the exception of residential addresses. However, it will be possible for an individual to apply to the Registrar of Companies to prevent information about their beneficial ownership being made available to the public. Exemption may be granted in exceptional circumstances, where an individual may be put at risk either because of the nature of the company or LLP in which he invests or due to their own personal circumstances.
These proposals will impose significant new obligations on LLPs, as well as private and unquoted public companies and individuals who hold significant interests in them and it remains to be seen whether the costs and effort involved will be outweighed by the potential benefits. The Government did consider arguments that LLPs should not be included in the scope of the new rules, because of concerns about how the policy would practically be applied to LLPs and whether it might undermine some of the features that make LLPs attractive. However the Government has decided to press ahead and include LLPs because of a worry that, otherwise, LLPs may become the vehicle of choice for those seeking to hide the beneficial ownership of their business.
Where the government has come out on this is no real surprise. What was more of a surprise was the introduction of a new proposal to outlaw corporate members of LLPs. The earlier consultation paper had trailed the possibility of banning companies from having corporate directors, and now BIS has decided that it would be a good idea to extend this concept to members of an LLP. This could have a significant impact on existing LLPs which have corporate members and it could limit the use of LLPs for purposes such as joint ventures where, at present, they are a useful tool.
It is difficult to follow the reasoning behind this. LLPs with mixed membership between corporate and individuals have already had to come to terms with new tax legislation that has effectively closed any scope for egregious tax planning by involving corporates in LLPs. It is not proposed that companies will be stopped from owning an equity interest in a company, so why should they be prevented from having one in an LLP? If there are concerns about transparency if the members of an LLP are not named individuals then there should be other ways of dealing with this.