Limited Liability Partnerships - LLP

We consider below the key features of an LLP which will help us assess the advantages and disadvantages of this new business vehicle. As a preliminary point it should be stressed that the decisive consideration in deciding whether to adopt an LLP structure may be the taxation position (an LLP is taxed as a partnership rather than a company which may be more advantageous for all concerned).

Key Features

The key features of an LLP include:

It is a body corporate, ie a separate legal entity distinct from its members.  The LLP can own and hold property, employ people and enter into contractual obligations.  Debts incurred are the debts of the LLP.

An LLP has unlimited capacity which means that third parties need not be concerned about any restrictions on its activities.

An LLP has members but no directors or shareholders.  An LLP has no share capital and is not subject to the company law rules governing the maintenance of capital.

The members of an LLP have limited liability.  The LLP is liable for all its debts to the full extent of its assets.

An LLP has complete flexibility as to the internal structure which it wishes to adopt: there are no requirements for board or general meetings or decision making by resolution.  An LLP does not have a memorandum or articles of association.

As the members have limited liability, the protection of those dealing with an LLP requires that the LLP maintains accounting records, prepares and delivers annual accounts to the registrar of companies, and submits an annual return in a similar manner to companies.  However, the exemptions available to companies, for example with respect to the delivery of abbreviated accounts and exemption from audit also apply to LLPs.

Members and Designated Members

There are no shareholders in an LLP.  Instead there are members and they are identified in the initial incorporation document with subsequent changes to the membership being notified within 14 days of the event occurring.

Any person meaning any natural or legal person, may be a member of an LLP and the registrar of companies is not concerned with whether an individual member is acting in a personal or representative capacity.  For entities other than individuals, the key issue is whether they have legal personality.  If they have, they may be a member of an LLP, so any body corporate, such as a company registered under the Companies Act 1985, whether limited by shares or limited by guarantee, and whether acting on its own behalf or as a trustee, may be a member.

The legislation also requires that two or more of the members be identified as the designated members.  The designated members have statutory responsibility for certain tasks and are subject personally to sanctions in the event of default.  The designated members are not the management team of the LLP but are responsible for these defined statutory tasks which include:

  • signing the accounts
  • delivering the accounts to the registrar of companies
  • appointment and removal of the auditors (if required)
  • notification of membership changes and changes to the registered office to the registrar of companies
  • preparing, signing and delivering the annual return
  • applying for the LLP to be struck off the register

In default of notification to the registrar of companies of the designated members, all members are designated members.  Given this default position and the tasks imposed on designated members, anyone who is a member of an LLP should check that there are designated members.

Members’ Obligations

All members, not just the designated members, are agents of the LLP, and as such owe the duties of an agent to the LLP.  The typical obligations of agents include obligations to act in the interests of the principal (the LLP), to avoid conflicts of interests and a prohibition on the making of secret profits, and some elements of these requirements are reflected in the default provisions.

While members are the agents of the LLP, they are not agents of one another and the legislation does not regulate the relationship between the members.  The reason for the omission was the potential for conflict between the duty which the members owe to the LLP (as agents) and any duty which they owe one another.  The solution adopted was to impose the former duty as a matter of statutory obligation and to leave it to the members to address their internal relationship in a separate LLP agreement.

An LLP Agreement

As noted  above, the statute makes no provision for directors or a board structure or any of the management structures familiar from company law.  The management structure and other matters should therefore be addressed by the members in a separate LLP agreement.  Any such LLP agreement is not registered at Companies House and it remains a private document.

The legislation envisages that an LLP agreement will be the norm.  There are two main reasons for this:

(i) the default provisions provided by the Regulations are unlikely to be appropriate in many instances.  For example, the default position in the absence of an LLP agreement is that every member may take part in the management of the LLP; all the members are entitled to share equally in the capital and profits of the LLP and no member is entitled to remuneration for acting in the business or management of the LLP;

(ii) the default provisions are limited in scope and there are many issues which they do not address, such as the nature and extent of the capital contributions to be made by the members and how disputes between the members are to be resolved.

  • A comprehensive LLP agreement governing the duties and responsibilities of the members is a necessity, therefore, and it will need to make provision for:
  • the management of the LLP
  • the decision-making process
  • the capital contributions required of the members, both while a going concern and (if any) on liquidation
  • the division of profits
  • changes to the membership
  • dispute resolution
  • termination of the LLP and
  • provision for the amendment of the LLP agreement

The internal flexibility conferred on members of an LLP by leaving it to them to devise their own management structure must be weighed, therefore, against the need to draw up an LLP agreement.

A member of an LLP will be subject to obligations under the statute as an agent of the LLP and under the LLP agreement or, in the absence of any agreement, under the default provisions contained in the Regulations.  A member who is a designated member will have the additional responsibility of compliance with the statutory obligations imposed on designated members which were noted above.

A Choice

The advantages of an LLP include:

  • Limited liability: reduced risk to personal wealth from creditors’ claims
  • Internal flexibility: facilitates participation in management and maintenance of ethos of partnership

If the position of an LLP is compared with a private limited company, such companies have:

  • Limited liability – same as LL
  • Internal flexibility – the impact of the company law requirements for formal board and management structures on small companies can be overstated.  In fact, the law facilitates informal and flexible decision making in such companies, for example, allowing meetings to be called on short notice, use of written resolutions and acceptance of informal unanimous assent
  • Privacy – same as LLP – disclosure subject to exemptions
  • No need for LLP agreement – the memorandum and articles of association act as default standard provisions

The LLP structure will appeal to some, most notably the professions, in that it meets their need for limited liability while offering the possibility of retaining internally the ethos of partnerships.  The LLP structure is also attractive for some investors because of the ability of members to participate in management without the risk of losing limited liability, the absence of capital maintenance rules and the advantageous tax position.