Removing the 20 partner limit
Comments from the Association of Chartered Certified
Accountants
June 2001
ACCA agrees that the current reviews of company and partnership law, and the introduction of the Limited Liability Partnership (LLP), together mean that the time is right to review the long-standing limitation on the number of partners in a partnership. Consideration of this matter needs to take into account, firstly, the original purpose of the twenty partner limit and, secondly, whether the limit has any practical usefulness in contemporary circumstances.
With regard to the first consideration mentioned above, the Law Commissions, as part of their wide-ranging review of partnership law, have established that the original rationale for the limitation has long ceased to be relevant. The fact that the provision no longer fulfils its original purpose is, in itself, a strong argument for its abolition.
As for any other practical usefulness that the limit might have, its most substantial value is, arguably, that it has the beneficial, albeit incidental, effect of reinforcing the partnership ethos, to the extent that it prevents partnerships from becoming so large and diverse that they cannot realistically function on the basis of mutual trust and dependence between their partners.
It is apparent, however, that the law does not consciously set out to perform this function. This is clear from the fact that so many types of firm have over the years been afforded exemption from the basic limitation.
We question in any case whether there is any need for the law to play any regulatory function of this kind. Whatever the size of a partnership, it is at all times subject to partnership law and its partners are subject to the duties and liabilities which are imposed on them because of their status. The onus is at all times on each individual partnership to consider whether it is prepared to accept these conditions of operation.
In view of the fact that partners are agents of each other and can therefore bind each other, we believe that it will continue to be the case that a firm will not accept a new partner without giving very serious consideration to whether that prospective new partner can be trusted to act with integrity and competence on behalf of the firm. Likewise, no individual will accept a partnership in an existing firm without first taking steps to satisfy himself that he is prepared to enter into a relationship of mutual agency with the existing partners. Even after any reforms deriving from the Law Commissions' review have been implemented, the partnership structure is likely to remain one which is based on trust between the partners: this will continue to be so regardless of the line of business that is undertaken by a particular partnership and the number of its partners.
The Department raises the issue of the 'unwary' partner in a very large firm. It is already the case, of course, that an individual who enters into partnership with others can expose himself to risks and responsibilities that he is not properly prepared for. We do not see that there is any material difference, in terms of personal exposure, between the risks run by a partner in a fifteen partner firm and those run by a partner in a thirty partner firm. The crucial point is that the incoming partner in any partnership must ensure that he is aware of the nature of the partnership structure and that he is comfortable on a personal level with the prospect of entering into a relationship of personal trust with the existing partners. Whatever the size of the firm, it must always be down to the incoming partner in any firm to establish, if necessary with the help of professional advice, what the extent of his risks and responsibilities is and to make his decision on the strength of that.
For those partnerships, and individual partners, who find it difficult to reconcile partnership obligations with the circumstances of their firm, there is now, in the form of the LLP, a customised alternative. Those firms that consider that they have become or are likely to become too large or too diversified to continue under the constraints of partnership law can, therefore, become LLPs and thereby secure a high degree of personal protection for their partners/members. Since this option now exists, any firm which remains as a traditional partnership can be assumed to have decided that it is comfortable with the partnership structure.
ACCA therefore agrees with the Department that there is now no sound reason for retaining the twenty partner limit on partnerships. We would welcome the change for the additional reason that the abolition of the restriction would help to create the conditions for the further expansion of the multi-disciplinary partnership, a concept whose development we support.
With regard to the specific questions set out in page 4 of the document, we would respond as follows:
Does the current limit place a burden on partnerships et al?
It does where partnerships feel the need to make artificial arrangements, through nominee partners and the like, to ensure that they comply with the statutory limit.
What use might be made of enlarged partnerships?
Venture capital partnerships are likely to be among the prime users of the extended structure.
Might the removal of the limit remove necessary protections?
No.