What is a Limited Liability Partnership (LLP) (Z147)

Background

A Limited Liability Partnership (LLP) is a form of legal entity for carrying on business which was introduced in England by the Limited Liability Partnerships Act 2000.

An LLP is, in many respects, a cross between a partnership and a limited company.

Under English law, a partnership does not have a legal existence separate from its members and the individual partners are jointly and severally liable for the obligations and debts of the partnership.  Many professions have been required either by law or by the rules of their professional body to trade as partnerships without the protection of limited liability which is available to the shareholders in a limited company.

It was largely on account of pressure from the large professional practices, concerned at the risks to which individual partners were exposed, that the Limited Liability Partnerships Act was introduced.

What is an LLP?

An LLP is a legal entity separate from its members and able to enter into contracts in its own right, to own property and to have fixed and floating charges secured over its assets.

The members of an LLP have limited liability although in certain circumstances there is a risk that individual members could still be liable for negligence.

Unlike a limited company, there is no separation of the roles of shareholders and directors – the members of an LLP in effect combine these roles as they do in a partnership.

What are the formation and other regulatory requirements?

An LLP is formed by filing incorporation documents at Companies House.

Although there is no legal requirement for an agreement between the members, in practice every LLP should have an agreement between the members which sets out the terms on which the LLP will operate. This agreement is likely to be similar to a partnership agreement.

Unlike a limited company, there are no standard Articles of Association which set out the rules for administration, meetings etc. so a formal agreement is needed to deal with these issues.  It is recommended that the terms of the LLP agreement are settled before the LLP is formed.

In order to form the LLP, there have to be at least two ‘designated members’ who sign the incorporation documents.

Amongst the requirements for an LLP are:

• The need to appoint auditors unless the LLP qualifies as a small LLP and has a turnover of less than the statutory threshold which is £10.2 million and a balance sheet of less than £5.1 million and less than 50 members.   (These threshold figures applied on 1 January 2016 and are updated from time to time, so you should check if they have been changed.)
• Annual accounts must be filed at Companies House showing ‘a true and fair view’ of the business.  Abbreviated accounts can be filed by a small LLP. These accounts will be available for public inspection.
• The papers at Companies House must show the names and addresses of all the members and any change in the members must be notified within fourteen days.
• There must be at least two “designated members” who are responsible for dealing with all the formal documentation, filing of returns, etc.  Designated members who fail to carry out their duties could be fined.

What about taxation?

The profits of an LLP are taxed in the same way as a partnership – i.e. in the case of individuals the members are taxed under Schedule D on a self-employed basis.

If a company is a member of an LLP it will pay corporation tax on its share of the profits.

If an LLP disposes of a capital asset, any gain or loss will be allocated amongst the members pro rata according to their interests in the LLP.

Winding up

There are regulations which deal with the winding up of an LLP which follow company legislation and allow for voluntary winding-up by a decision of the members.

In the case of insolvency, again the regulations are similar to those for directors of a limited company and a liquidator has the power to recover any money withdrawn by a member in the two years preceding the winding-up.

Checklist of points for drafting a Limited Liability Partnership Agreement

When drafting a Limited Liability Partnership Agreement, the following points need to be considered for inclusion:

• The agreement should be prepared before the papers are filed at Companies House to incorporate the LLP.
• The parties to the agreement will be the members (individuals or companies) establishing the LLP

• The agreement may provide for the LLP to become bound by the agreement once the LLP is formed.
• Specify which of the members will be “designated members” for the purposes of the Act.  The designated members should be made responsible for submitting the incorporation documents to Companies’ House.
• Specify the name of the LLP (here it should be noted that until the papers are filed, there is no certainty that the name will be available).
• Specify the address of the registered office and the accounting reference date (i.e. the date to which the annual accounts are made up each year).
• State the capital contributions of each of the members and deal with the possibility of additional capital.
• State the profit shares of each of the members and any rights they have to draw income on account of their profits.
• Deal with the decision-making procedures – listing those matters on which the consent of all or a specified majority of the members will be required.
• Deal with any requirements for members to retire, including any notice period which must be given if a member wishes to retire.
• Set out the grounds on which a member can be expelled from the LLP.
• Deal with the transfer of a member’s interest in the LLP on his death, retirement or expulsion.
• Cover such matters as holiday entitlement of members.
• Include a dispute resolution procedure.