Following the trail of a new animal
Antonia Swinson, Regeneration & Renewal Magazine,
20th February 2004
|Almost by accident, the government has created a legal structure that could
transform the financing of regeneration. Antonia Swinson meets a strange hybrid
named the Limited Liability Partnership.
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For the first time anywhere in the world, it became possible to form a corporate
body - an entity with a legal existence independent of its individual members -
which had both collective limited liability and the mutual, cooperative
characteristics of partnerships.
Throughout the regeneration sector, people are looking for organisational
structures that can trade freely while protecting community interests. The
Government's attention lies with
Community Interest Companies
(CICs), a new
legal form designed for social enterprises. But at the cutting edge of economic
thinking lurks a new animal: the curious hybrid of a commercial company and a
partnership, known as a
Limited Liability Partnership (LLP). This model could
revolutionise the ability of the voluntary sector and social enterprises to make
an impact in regeneration - and there is an irony here, given that the legal
form was born at the very sharpest edge of commerce.
During the early 1990s, professional partnerships such as Arthur Andersen became
concerned that their individual partners' acceptance of liability for their
company's actions put them at risk of bankruptcy. Long before Enron's demise was
a twinkle in regulators' eyes, the City persuaded Jersey's parliament to draw up
an Act creating the LLP - and the British Government, fearing an exodus of
partnerships to Jersey, passed the Limited Liability Partnership Act in April
2001. For the first time anywhere in the world, it became possible to form a
corporate body - an entity with a legal existence independent of its individual
members - which had both collective limited liability and the mutual,
cooperative characteristics of partnerships.
There are now 7,000 LLPs around the country. In part, the growth is because
they're so easy to create; two designated members must complete an application
Companies House website, and pay £95 to register the entity.
There is no Memorandum of Incorporation, no Articles of Association, and no
Shareholder Agreement. Chris Cook, previously a civil servant and then a City
regulator, was one of the first to grasp just what an extraordinary beast is the LLP. He has set up a consultancy to advise different bodies on the format. The
LLP has, he says, created a new asset class: a cooperative, community-based
medium of exchange.
"When I pointed it out, I don't think that civil servants in Whitehall were very
pleased to find that they had accidentally created the essence of ethical
economics," says Cook. "The LLP makes it possible for all stakeholders in an
enterprise - staff, management, investors, suppliers and clients - to be members
of an Open Capital Partnership, which replaces the usual adversarial contracts
of debit - and equity-based models."
In essence, all these stakeholders are brought inside the partnership, so their
interests are aligned; it's quite a change from traditional structures, which
pit stakeholders in competition against each other. The LLP delivers an ideal
combination of the collective and the individual; it's flexible and easy to
establish for social enterprises, while its partnership system is robust enough
to make it attractive to the private sector.
To understand how an LLP operates, it's best to consider a theoretical example.
Let's say Bloggside Regeneration holds a brownfield site, while Bloggshire
Islamic Community Arts (BICA) needs a workshop in which to train local people to
produce patterned Islamic tiles for the growing UK market. BICA becomes the
'occupier member' and Bloggside Regeneration becomes the 'capital
member' of the
new Bloggside Community LLP, with BICA paying Bloggside Regeneration a
peppercorn land rent.
A new workshop, costing £100,000 is acquired using money from a Community
Development Finance Institution (CDFI), which becomes the LLP's second capital
member. The CDFI then receives 2 percent of BICA's total revenue: as a 'capital
rental' paid for the use of finance, equivalent to those paid for the occupation
of land, this payment does not count as interest, making the LLP and acceptable
financial structure for strict Muslims. Hence, rather than a contract whereby a
debtor organisation pays interest to a creditor, or an investor buys
part-ownership of a company in the form of shares, both financier and
beneficiary join a partnership whose revenues are then shared. In time, BICA may
acquire ownership of the capital asset by making payments over and above the
required capital rental. The rental payments will then decline with the
The same structure says neighbourhood renewal consultant Stephen Hill, could
benefit future community land trusts. "Lots of different partnerships can come
together and pool resources. It's surely only a matter of time before the
regeneration industry wakes up to this." The LLP structure is taking some of its
biggest steps in Scotland, where West Lothian Chamber of Commerce is planning a
LLP which is intended to allow members to offer each other cheap credit at
Under the plans all chamber members will be eligible to join 'guarantee
societies', who themselves are members of the West Lothian Guarantee Society LLP.
Each guarantee society would have a 'common bond' based on location or
profession, and guarantee the credit of its members through a collective
guarantee of an agreed percentage (in this case 25 percent) of the member's
For example, say an IT workers' Guarantee Society has a collective turnover of
£100 million and therefore a total guarantee value of £25 million - the sum
which may be loaned at any one time. Members grant one another trade credit
without interest, and up to credit limits - based on members' trading history,
type of business and turnover - set by the service provider, a bank, which
levies a percentage charge (say 0.25 percent) to members for use of the
guarantee. Half of this charge goes to the bank to defray administrative costs,
and the rest to a pool in case of defaults.
In the event of a default, the pool pays the creditor half the loss, with the
rest paid by the bank - this latter provision is a built-in disincentive, to
stop the bank from granting guarantees to all comers in order to boost income.
Yet because default rates are so low in this kind of scheme and a bank's
participation brings it the goodwill of the entire membership, banks are keen to
Members of the societies, then, gain access to guaranteed credit at a minimal
cost, and can offer credit to other members in a way that should minimise the
risk of losing any of their cash. Within community-based system's like this,
peer pressure is a powerful force against defaulting; but if a business does go
under, members who have made loans can claim their money back from the pool and
bank. Should the pool run dry, members are liable for defaults up to the full
guarantee value, but borrowing costs and credit ratings are designed to avoid
the need for this facility.
Perhaps the most potent application for LLPs, however, is their ability to draw
in private finance for public projects, offering an alternative to private
finance initiatives (PFIs). See box below. By drawing the users and stakeholders
of a service into its ownership, LLPs could build community links and ensure
that the aims of a service's financiers are aligned with those of its providers
"I see a role here for council and trade union pension funds," says Cook. "The
rate of 'rent' paid for use of the capital could be set perhaps at 4 percent
above inflation. This would be unaffected by Bank of England interest rate
decisions; it's not lending, but taking a proportionate share of gross revenues.
With risk spread among the partners, it would be less risky than shares, more
profitable than gilts, and more accountable and transparent."
"At present the LLP animal is young, untested, and just lurking at the outer
edges of the economy. But, given its consensual and pragmatic nature, it is
surely only a matter of time before its tracks are more widely seen.
How extraordinary it would be if the wee beastie of the LLP one day replaces the
old debt and equity models of global capitalism.