published in VODE 21
- The Journal of "Devolve!"
potential of the LLP
Chris Cook answers questions
VODE 19, Chris first exposed Devolve! members to the new possibilities
opened up by Limited Liability Partnerships. He argued that
this cross between a company and a partnership has some special
features that can be used to undermine the dog-eat-dog economic
system that created it. However, these ideas take a bit of
chewing at first especially if, as for most of us,
economics has always been a bit of a turn off. The original
essay is repeated (in smaller type) for quick reference. The
questions (put by Bill) are in bold type and the explanations
by Chris follow each question. Ready to go?
it is true that the road to Hell is paved with good intentions,
then perhaps the road to Heaven is paved with bad ones. The
innovation now threatening the existing Western
form of Capitalism is an unintended consequence: proof positive
of the cock-up theory of History. The story begins
in that bastion of democracy Jersey.
the early 1990s major professional partnerships such as Andersen
became increasingly concerned at the risks run by individual
partners of bankruptcy caused by their unlimited liability
for actions or omissions by their fellow partners. Two of
the leading UK professional partnerships commissioned a major
City law firm at a rumoured cost in excess of £1m
- to draw up an Act of the Jersey States Parliament
establishing a new form of Limited Liability Partnership (LLP).
Suitably placed UK press articles raised the spectre of a
mass migration by professional firms to Jersey and the Conservative
Minister Michael Heseltine then in office ordered the commencement
of the consultative and legislative process subsequently continued
by New Labour that eventually resulted in the UKs Limited
Liability Partnerships (2000) Act, which came into effect
on 6 April 2001. The outcome is an economic entity or Enterprise
which is both novel and supremely simple. For the first time
anywhere (unbelievably) it is possible to form a corporate
body (i.e. an entity with a legal existence independent of
its individual Members), which has:
collective limited liability (not to be confused with the
pre-existing form of UK Limited Partnership or
the US LLP, both with individually limited liability);
this collective limited liability mean that a group of people,
say the members of a credit union, has a liability limited
only to the stake, the capital, they have put into the partnership?
This still means, however, that if the LLP fails, goes bankrupt,
then the credit union loses all its funds.
Yes, you can only lose what you put in. If an LLP were
acting as a Credit Union then it would be subject to whatever
the FSA regime prescribes, which I THINK includes compensation
for depositors. Not that I advocate deposit taking or interest
in any form.
the mutually beneficial collaborative and co-operative characteristics
would be helpful if these characteristics were spelt out so
that would-be partners know the advantages of joining an LLP.
Members of an LLP are "all on the same side"
there is no "Profit" and no "Loss"
as between the Members WITHIN a partnership, merely the creation,
exchange and accumulation of economic value - in whatever
form, "Money" or "Money's worth" members
choose to use. 
are already over 7,000 LLPs: which is not surprising when
it is considered that all that is necessary to form one is for
two Designated Members to complete an application
downloaded from the UK Companies House web-site and submit it
with a £95 fee.
an LLP is formed by two Designated Members, is it possible to
include other stakeholders having equal status?
Yes indeed: Membership of the LLP and adherence to the LLP
Agreement can extend to anyone, irrespective of whether or not
they choose to be "Designated". There is nothing special
about Designation except for responsibility to Companies House.
Many LLP's "Designate" everyone.
There is no requirement for the Victorian era Memorandum
of Incorporation or Articles of Association
and no need for a Shareholder Agreement. The voluminous and
complex Companies statutes, the massive body of interpretative
case law and all the regulatory issues in respect of corporate
governance and corporate social responsibility (an
oxymoron if ever there were one) are irrelevant because the
conflict of interest between shareholders and all other stakeholders
does not apply. All that is necessary in an LLP is an agreement
between Members that need not even be in writing since regulations
based upon existing UK partnership law are the default
However, there are two properties of this new
UK LLP that are radically new.
Firstly, it is possible for all stakeholders, whether
staff, management, investors, suppliers, service providers or
customers to subscribe to a suitably drafted Member Agreement,
rather than to complete adversarially negotiated Contracts of
Employment, Supply Agreements and the like - thereby putting
the Open in the proposed Open corporate
See the comment above about two Designated Members. If these
stakeholders are not party to the original partnership, are
not Designated Members of the original agreement (which appears
to be limited to two), what is the relationship between a
suitably drafted Member Agreement and the original LLP
agreement between only two Designated Members? Do the stakeholders,
who were not included in the original partnership, have equal
rights with the Designated Members or is the Member Agreement
inferior to the original LLP? What is included in these Member
stated above Designation is a merely administrative title. Any
number of people (or organisations, or even LLPs!) can
come together to form an LLP and draw up any form of membership
agreement for any legal activity or purpose. One of the key
clauses of any LLP agreement will relate to the membership provisions:
i.e. when and how people join and leave the LLP. In the absence
of any provision, then partnership law applies by way of default:
i.e. all Members must agree to changes. For a big LLP, that
would get unwieldy pretty quickly.
the existence of a corporate body that also has the beneficial
characteristics of a partnership is capable of literally changing
the nature of Capital itself. How so? It is now possible - through
suitable provision in the Member Agreement - to create a new
form of Open Capital in the form of proportional
shares/partnership interests (e.g. one half, five tenths, 500
thousandths - as opposed to fixed shares of say £1.00
Nominal or Par value). So everyone gains
if the enterprise increases in value. No party can gain at the
expense of others. 
seems from this that the employees, say, or any stakeholders
of an LLP, can, if they wish, subscribe a proportionate share
of the capital. If they do, does this increase the number of
Designated Members of the LLP? If it doesnt then the questions
asked above have to be answered.
If you are an "employee" then you are outside the
LLP and with a contract: the only financial relationship you
would have is as either a debtor or creditor. Similarly for
a supplier, customer or financier. If you are a "Member"
within the box, then your work or other contribution will give
you a guaranteed revenue share and/or returns on any "Equity"
Capital held in the LLP, as laid down under the agreement.
model has already been (albeit unwittingly) demonstrated by
the Hilton Group in its recent sale for £350m of 10 hotels
to an LLP in which it is the 40% owner and Occupying
Member (or Capital User), while another LLP itself with
three Members including Bank of Scotland owns the balance
of 60% and is the Financing Member (or Capital Provider).
is not a model of stakeholders joining an LLP but of an original
two partner LLP.
True, but a radical demonstration of an entirely new risk-sharing
form of finance nonetheless. Neither Debt nor Equity, but a
Hilton pays to the financiers each year for the 27 year term
£3m plus 28.8% of the hotels gross revenue, subject
to a floor of £17.5m pa. There is no debt,
and no mortgage: equally there is no Freehold/ Leasehold sale
and leaseback either of which would have given rise to
a fixed overhead to the Hilton group and therefore to a divergence
of interest between the Provider of Capital and the User.
The Hilton has entered into an agreement to pay £3M +
to the Financing Member this is a debt, an obligation, even
if is not as a result of a loan. What happens if The Hilton
cant pay what it has agreed to pay? I have already asked
what happens if The Hilton have a bad year? Is not the original
agreement then broken and, if so, what penalties are incurred?
In fact the Hilton deal is an imperfect example in the sense
that because a Bank was involved a lower (fixed) limit was agreed.
So the outcome was in fact a lower than normal rate of interest
with a sharing of risk on the up side. That is not the point.
Banks LEND: they do not invest. Worse than that they lend money
that they create with a stroke of a pen, but that is another
story. Had the Bank been exposed on the downside then they would
have had (under Basel Capital requirements) to put aside a large
amount of risk capital to cover it. Other than the outline of
the Hilton deal I have no idea as to the details: had I been
involved I would even now be sitting on a beach somewhere. The
example merely illustrates the possibility of TRUE investment
by those (you, me, pension funds) interested in a proportional
"share" in a productive asset and the revenue streams
that it produces. A new asset class less risky than "Shareholder
Value" style "Equity" yet more remunerative (potentially)
than interest-bearing Debt. 
outcome is that sharing of risk and reward characteristic of
a true partnership: if Hilton has a good year the financiers
do too. One interesting consequence of the model is of a method
of financing property purchases that is Islamically sound, being
outside the debt/interest paradigm.
possibility of property purchase through an LLP needs to be
elaborated in detail. How, for example, would a couple trying
to get on the housing ladder find an LLP partner who would provide
the necessary capital which is not a debt? What would this partner
gain if there were no collecting of interest on a debt?
The investor - typically a pension fund and quite likely
the one that the Occupier is already a Member of - would become
the "investor" member of the LLP that owns the property.
The occupier (also a partner-member) simply rents the Capital
they do not own. So that if the house is worth £100k with
a market rental of £5k pa then if Mr and Mrs X own 10%
of the Equity (because they could only raise 10k) they must
pay a rental of £4.5k pa (= rent on the 90k they dont
yet own). If they pay more than that then they acquire more
Equity (own more of the house) at the prevailing market value.
If they pay less, they do not get repossessed (as a borrower
would if s/he failed to pay the mortgage or were a tenant who
did not pay the rent). They simply reduce their share
transfer some bricks back to the financing partner. The Occupier
only gets repossessed if her/his Equity runs down to zero and
s/he STILL does not pay the Rent. For the Investor there is
a combination of the market rental on the Equity they own, plus
Capital Gain or Loss as property prices rise or fall: "virtual
" property really. Both parties cut out the market "middle
man" who borrows cheap and lends dear.
the fact is that any Enterprise or economic entity: from a co-habiting
couple to a government sponsored PPP or PFI; from a football
club to a software firm; may be constituted using one or more
would a cohabiting couple want to form an LLP? All the examples
mentioned need to be explained, in detail, so that readers will
understand just how an LLP works in these circumstances. How,
for example, would a Private Finance Initiative enterprise benefit
by changing to an LLP? What agreements and arrangements would
such an LLP have?
A co-habiting couple secure the assets they jointly enjoy,
so that we do not see cases where so-called "common law"
wives see themselves on the street when their partner dies having
omitted to make a will. There are moves imminent towards the
registration of civic partnerships that accomplish some of this.
I believe that "Family Corporation" LLP's will essentially
make most Trust/ Inheritance Law redundant, in addition to large
chunks of law relating to Wills.
for PFI, simply put:
(a) the cost of finance comes down dramatically - probably to
"inflation linked" (revenues will be regulated on
a formula linked to inflation more often than not) giving "real"
returns of the order of 3% to 4% while:
(b) risk sharing between PFI parties becomes much more straightforward.
Open Corporate Partnership is an optimal Enterprise
model in the way that it allows all stakeholders to work together
to co-operatively and collaboratively maximise the Value created
by the enterprise: as opposed to the current model, where one
constituency of stakeholder competitively attempts to extract
value from the others.
in an LLP there could be conflicting interests. The workers
of an LLP who have not entered a stakeholders agreement
but remain employees would want to maximise their wages and
conditions as they would in a traditional firm. The partners
in an LLP, their employers, would want to maximise their profits,
perhaps in order to honour their agreements. These competing
interests would lead to conflict. It seems to me that this can
only be avoided if the employees form their own LLP within the
existing one and form a partnership with it, so that they have
a vested interest in co-operating rather than being in an adversarial
before, you are either "inside the box", and party
to the consensual/collaborative LLP agreement or "outside
the box" negotiating employment etc contracts adversarially
as now. Sure, there will be negotiations as to the revenue shares
when joining/setting up/operating LLP's, but these will be subject
to provisions set out from the beginning in the agreement. A
workers LLP within the main LLP would be one way of doing
it, and trade unions may come to recommend this. We are looking
at "pre-distribution" rather than "redistribution".
to its optimal nature, commercial enterprises that adopt the
model will in due course be able to undercut those enterprises
that do not the Co-operative Advantage. Profit
and Loss give way to a mutual creation and exchange
of economic value created by individuals collaboratively and
co-operatively working together.
seems to imply that the costs of an LLP will be lower than a
traditional enterprise. Why are they? Inputs to the LLP (materials,
electricity, transport and so on) have to be paid for. Where
are the savings made? From initial set-up costs? This needs
to be spelt out.
It's what the Co-op movement call the "Co-operative
Advantage" i.e. no need to pay returns to "rentier"
capital (people who make money from money). The use of "productive"
Capital will still have to be paid for using the Capital Partnership
model I describe. The outcome I see is for a model where we
could see LLP's bringing together Co-ops of customers ("retail
co-ops") and Co-ops of staff/service provider/suppliers
("worker co-ops") within the same framework
outcome will be a plethora of networked and non-hierarchical
partnerships and a new capital and monetary market infrastructure
based upon an open and transparent architecture.
present capital and monetary market is dominated by commercial
banks who create money, in the form of debt-carrying loans (they
dont lend existing money), from which they make immense
profits. Those profits depend upon their exploitation of those
who have borrowed from them. Are you suggesting that this exploitative
relationship can be replaced by an LLP one? How? If there is
not a hierarchical and exploitative relationship, how do the
banks make their profits? What replaces the loans, debts, they
create out of thin air? 
are right of course: Banks are a bit like builders who don't
have to pay for the Land they build on. Personally I would have
no difficulty in paying a Bank its reasonable costs, and my
share of defaults, but why should I pay for THEIR use of MY
credit? Which is exactly how we break the mould with the "Guarantee
Society" form of the LLP currently being put together in
Scotland by the West Lothian Chamber of Commerce. Simply put,
local businesses and individuals will join "Guarantee societies"
probably initially based upon chambers of commerce. Trade credit
is granted bilaterally as now (e.g. I buy a computer from you
for £1000 with 60 days to pay) but without interest. You
do this because you are happy with the price and have the benefit
of a collective guarantee from the "Guarantee Society"
of which we are both members and which has some sort of "common
bond" e.g. geographical, like the Chamber of Commerce or
functional, like a Craft Union).
pay a charge for the use of the Guarantee of which some:
(a) pays for the cost of running the system, working out "Guarantee
limits" - a true "value-added" Banking function
- to which we are subject, as opposed to Credit limits); and
(b) goes into a "default fund" which will pay you
if I can't - a form of mutualised credit insurance in a sense.
Essentially the Guarantee Society takes the infinitely flexible
LLP form to create a rather elegant entity synthesising a company
limited by shares with one limited by guarantee since the Society
members will be responsible for the guarantee in proportional
"shares" based upon turnover.
existing political thinking becomes obsolete as the economic
assumptions underpinning existing political analyses break down
in the face of a new phenomenon. Redistribution through extracting
Value from one constituency of stakeholder (however undeserving)
and allocation to another becomes irrelevant. The alternative
is now pre-distribution whereby the Value generated by Open
Capital is more equitably distributed through revenue sharing
agreements giving rise to a new balance between Equity and Equality.
assumes that there will no longer be those, the poor, who are
in need of redistributed wealth. It also assumes that they,
the poor (the unemployed, the unemployable, the aged, the disabled,
and so on) will be in the Open Capital sphere as stakeholders
or as Designated Partners. Who would enter into such a partnership
with them? What would they, the poor, be able to contribute
to the co-operative enterprises you envisage?
This is where we enter the realm of the "Community Land
Partnership" which those familiar with Henry George would
recognise. Those who assert exclusive rights of ownership over
a "Common good" such as Land, Intellectual Property
or non-renewable energy would compensate through a rental
those they exclude. The outcome would essentially be
of forms of national dividend.
Capitalism is an emergent phenomenon that will supplant
the existing form of Capitalism (which was itself an unplanned,
emergent process) and it is emerging in the same manner that
a 19 year old single-handedly destroyed the business model of
the global music business through his invention of the Napster
music file-sharing mechanism. Or the same way that the small
community of global oil traders commenced trading oil and oil
products in Yahoo instant messaging chat rooms without
their management even being aware of it. 
summary, Capital is and always has been broken by
the conflict within it between Permanent Capital
(e.g. Freehold property or Equity in the form of
shares in a limited liability company) and Temporary
Capital (e.g. Leasehold property or Debt finance). Open
Capital using the LLP structure bypasses that conflict.
would the conflict, between property, capital, owners and borrowers,
between the financiers and the financed, be resolved by Open
Capitalism? The owners of capital will still want their rake
off. What attractions are there for them in LLPs?
Of course they would want their rake off. But they would
no longer make money from money as the very nature of money
changes organically to comprise revenue streams derived from
productive assets in the joint ownership of occupier and financier.
Change doesn't happen overnight. But it will rapidly become
apparent to current "owners" that by participating
in such partnerships they will get a smaller share of a much
bigger pie and hence benefit overall. It is a pre-distributive
model. As Henry George said, there is no need to take away the
Land, merely part of the Rental value. Most of all, it is a
model which is "emerging" spontaneously in the commercial
world because those enterprises who do not use it are
already beginning to find themselves at a disadvantage to those
Open Capital a proportionate share in an
enterprise held for an indeterminate period of time is
a concept so simple that as J.K.Galbraith said of the creation
of Money by private Banks: the mind is repelled.
Open Capital resolves the conflict between the financiers
and the financed, to the mutual benefit of both, and thereby
opens the way to a truly Co-operative Society.
in May 2004 by Woody of "Devolve!"