We advise members and LLPs on all aspects of an LLP life-cycle: upon commencement, advising on and drafting an LLP agreement, the introduction and retirement of members, sale and purchase of businesses, mergers, incorporation (whether to a limited company) and dissolution.
An LLP must have a minimum of two members, but there is no limit on the maximum number of members. At least two members must be named as the ‘designated members’ who have the responsibility for dealing with Companies House filings.
With regards to tax, the LLP is treated as an ordinary partnership, under which each of the partners is liable for their own income tax relating to their share of the LLPs profits.
Key Features of a Limited Liability Partnership
A Limited Liability Partnership (LLP) has the following key features:
- Incorporated by registration at Companies House
- Separate legal entity to its members which means it can own property and assets, contract with third parties, sue and be sued, and be liable for its own debts
- Limited liability for members except in certain circumstances
- Each member is an agent of the LLP for the purposes of LLP business. The LLP is therefore liable as principal for agreements entered into by each member in the course of the LLP business; each member has wide authority to bind the LLP
- Taxed as a partnership which means that the LLP itself is not liable to pay tax but each individual member must pay tax on individual profits and losses
- Flexibility in terms of organisation and operation
- Accounting and reporting requirements similar to those of a company
- An LLP can create floating charges and grant debentures
- Filing requirements are similar to those of companies
- Records to be kept at the registered office
- A Member has a duty to account for profits which it has gained via a competing business
- A Member has a duty to account for benefits it has derived from transactions concerning the LLP and its business or property without the LLPs consent
Members may be:
- A fixed share member who has a small fixed share of the equity and guaranteed minimum drawings if the LLP is profitable
- A salaried member whereby the member receives a fixed annual salary and no right to share in the profits or
- An equity member whereby the member has invested capital in the LLP and shall take a share of the remaining profits
Although a membership agreement is not compulsory, we advise that a membership agreement is entered into between the members which governs the operation of a LLP otherwise certain default provisions apply which may not be appropriate. The membership agreement is a private document which is confidential to the members and does not need to be publicly filed.
We recommend that, at least, the following areas are dealt with in the membership agreement:
- How profit is to be shared between members otherwise all members will be entitled to share equally in its capital and profits;
- An indemnity from the LLP to each member for payments made by him and personal liabilities incurred by him in the ordinary and proper conduct of the LLP’s business, or “necessarily done” by him for the preservation of the LLPs business or property;
- If appropriate, allocate a management structure, separate to the designated members, similar to that of a company;
- Set out how members may be admitted and the criteria they must meet otherwise consent of all existing members will be required;
- Set out how decisions may be made otherwise any decision arising on ordinary matters shall be decided by a majority of the members and any changes in the nature of the LLPs business shall require consent of all members;
- A person will cease to be a member of an LLP:
- On his death
- On the dissolution of a corporate member
- By agreement with the LLP members
- In absence of agreement, by giving reasonable notice to the LLP members
The membership agreement should include provisions dealing with voluntary retirement, expulsion for conduct, mental incapacity, and dissolution or insolvency of a corporate member;
- The membership agreement should also detail the financial entitlements of an outgoing members together with confidentiality obligations and restrictive covenants;
- Unlike for partnerships, LLP legislation does not provide that a relationship between members and between members and the LLP are of a fiduciary nature. However the membership agreement may set out that fiduciary duties exist;
- Set out whether or not past and present members are liable to contribute to assets on insolvency.
Positive steps must be taken to terminate an LLP. Unlike a partnership an LLP does not automatically dissolve if the membership falls below a certain number.
However, if membership falls to 1, the sole member has 6 months to appoint a new member otherwise the sole member shall be jointly and severally liable with the LLP for debts incurred by the LLP after the 6 months has expired.