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Limited Liability Partnerships (LLP)
A Limited Liability Partnership (LLP) is a new form of legal entity introduced on 6th April 2001 and is neither a company nor a partnership. It has its own legal personality just like a limited company and has unlimited legal capacity, e.g. to own property, employ staff, sue and be sued, create floating charges and join in other business enterprises such as being a partner in a partnership.
LLPs have mainly appealed to larger professional partnerships that want the protection of limited liability for the negligence of other partners but maintaining the flexibility of the partnership set up. It can however prove useful for other smaller businesses and some joint ventures.
LLPs and their Members
Any person, including a company, can be a member of an LLP. There must be at least two members but there is no maximum.
At least two members have to be "designated members" and have certain responsibilities for signing and filing documents. If none are designated by the partnership or the number of designated members falls below two, then all the members become designated.
Comparison with Limited Companies
- An LLP exists when a Certificate of Registration is issued. However, it does not need a Memorandum and Articles of Association.
- The rules for names of LLPs follow those of companies, and they need to have a registered office.
- Designated members are a bit like directors of a company, and have administrative and accounting/auditing functions.
- Many of the restrictions on company directors do not apply, e.g. disclosure of personal dealings, limits on service contracts, restrictions on substantial property transactions, restrictions on loans.
- Annual Returns need to be filed, as do audited Accounts showing a true and fair view under UK accounting principles, although smaller LLPs are exempt form an audit as for smaller companies. The accounts will be publicly available through Companies House. Annual General Meetings are not required.
- An LLP can create a floating charge over its assets, like a company.
- On insolvency, the usual routes available for companies are followed, i.e. voluntary arrangement, receivership, administration or winding up.
Comparison with Partnerships
- An LLP is not strictly a partnership, and it is expressly provided that partnership law does not apply to an LLP.
- Both a partnership and an LLP must relate to a venture intended for profit, so neither is suitable for use by a charitable body.
- For partnerships, every partner is an agent of the partnership and of the other partners, while with LLP's every member is an agent of the LLP itself, but not of other members.
- Like partners, members are not automatically employees of the LLP, although it is open for them to be made expressly employees (like salaried partners in a partnership).
- Members of an LLP can join or leave an LLP with the same flexibility as joining or leaving a partnership, without the problem of dealing with company share issues or transfers.
- Agreements to govern members' relationships with the LLP remain private, like partnership agreements. However, an LLP must publish its Accounts.
- An LLP has no share capital and there are no capital maintenance requirements.
- Most importantly, individual members of an LLP will not be liable for its negligence (unless they themselves cause it), and they will not generally be personally liable to creditors of the LLP over and above their capital share in the LLP, in the event of insolvency.
- For tax purposes, LLP members will be treated in almost exactly the same way as if they were partners in a partnership. The LLP is transparent for tax purposes and the members are subject to income tax on their profit shares, and capital gains on their share of any gains made by the LLP.
"Two or more persons associated with carrying on a lawful business with a view to profit" can incorporate an LLP.
They will need to sign and file Form LL IN01 at Companies House with the relevant fee. The usual Companies House rules on company names apply. The form specifies the registered office, and the names of the members. A registration certificate is issued by Companies House.
New members may be added at any time, in accordance with any agreement between the members. Form LL AP01 is filed at Companies House.
Ceasing to be a Member
A person ceases to be a member if he dies or is dissolved. He can cease to be a member by agreement with the other members. In default he can terminate his membership by giving "reasonable notice". Form LL TM01 has to be filed at Companies House.
There must be at least two members. If business is carried on for more than six months with only one member, the remaining member becomes jointly and severally liable with the LLP for debts incurred after the six month period.
An LLP has to have at least two designated members, who would normally be appointed by agreement with the other members. In default, all members become designated. Designated members appoint auditors, sign the Accounts, deliver them to Companies House, notify Companies House of changes and sign and deliver the Annual Return.
On insolvency, the usual routes available for companies are followed, i.e. voluntary arrangement, receivership, administration or winding up. Members can be responsible for preferences or wrongful trading, or a new obligation to "repay withdrawals" taken within 2 years of insolvency at a time when the LLP was unable to pay its debts (subject to court discretion).
Relationships within the LLP
Every member is an agent of the LLP, but they are not agents of each other. Members do not owe duties of good faith to each other.
However, by way of default regulations, a member must account to the LLP for any profits made by him in a business carried on by him, if that business competes with the LLP and is carried on without the consent of the LLP. Also, a member must account to the LLP if without its consent he derives a benefit from any transaction which concerns the LLP or makes use of its property, name or business connection.
The rights and duties of the members will be governed by any agreement between them, or in the absence of agreement, by default regulations.
The default regulations are:
- All members share equally in capital and profits
- Members have an indemnity from the LLP for liabilities from ordinary activities
- All members may participate in the LLP's management
- No members are entitled to remuneration from the LLP
- New members need unanimous consent
- A simple majority can decide anything, except a change in the nature of the LLP's business which requires unanimity
- The LLP's books are to be kept at its place of business and available to all members
- Each member must provide true accounts and full information concerning the LLP to the other members
- Expulsion is impossible without express provision
- A member may retire at any time on giving notice
Written Members Agreements
Even though there are default regulations, in practice it will be important for members to enter into an effective agreement before incorporating an LLP.
A properly drafted agreement should take into account the following issues:
- Capital contributions and withdrawals
- Shares of profits and losses
- Basis for preparing accounts and establishing profits
- Any special rights of members
- Voting rights of members and procedures for meetings
- Management of the LLP
- Transfer of members' interests
- New members
- Retirement and expulsion
- Competition from members or recent members
- Winding up
- Dispute resolution
- Disapplying statutory rules
Relationship with Third Parties
Every member is an agent capable of binding the LLP in its relations with third parties.
An LLP will not be bound by anything done by a member dealing with a third party if the member has no actual authority and the third party knows this or does not realise he is a member of the LLP.
Where a member of an LLP is liable to a third party for anything done in the course of the LLP's business, e.g. an act of negligence, then the LLP is liable to the same extent as the member. The other members will not be liable.
Contracts and Documents
The same formalities apply to contracts entered into by LLP's as apply to companies, i.e. contracts can be made under seal or in writing by persons with authority. An LLP need not have a common seal. A document signed by two members and expressed to be executed by the LLP is equivalent to executing under seal.
An LLP can create a debenture or floating charge or other charge. The usual rules as to registration at Companies House apply.
An LLP's name must appear on every place of business. The name must appear on all documentation. It must also state its place of registration and registered number, its registered office and the fact that it is a limited liability partnership.
An Annual Return has to be filed every year, as for a company, with details of the members.
Accounts and Auditing
The LLP incorporates the majority of the accounting/auditing provisions of the Companies Act. Thus, accounting records have to be kept. An LLP has to prepare Accounts for accounting periods ending on accounting reference dates. However, only designated members need to approve the Accounts, unless otherwise agreed, and there is no need for a directors' report. There must be an auditors' report. Accounts have to be circulated to all members and filed at Companies House within the nine month limit for private companies. There are exemptions for small and medium sized LLP's, in particular from the requirement for an audit. Accounts do not have to be laid before members at a meeting, as there are no automatic AGM's.
The aim of the tax regime is for LLP's to achieve tax neutrality for those converting an existing partnership into an LLP. For income and corporation tax purposes, including capital gains, an LLP is treated as being carried on by its members and members will be individually taxed on their profit shares or gains.
It is possible that an LLP could become liable for tax if it ceases to carry on any trade or business, or ceases to carry on a trade with a view to profit. It will then be taxed as a company. It is not a suitable business vehicle for venture capitalists or other entities not themselves carrying on a business.
There is no tax payable on any disposal on transfer of the assets of a partnership into the name of an LLP and no changes in base value should occur.
Stamp duty exemption should apply to the transfer of property from an existing partnership into an LLP if the transfer takes place within a year of incorporation. The identity of the partners in the old partnership and the members in the LLP must be the same. Further, their proportionate beneficial interests in the property must be the same, or if there are any changes these must not have arisen for avoidance purposes. Any exempt transfer will still need to be denoted as not chargeable.
A transfer of property from an existing partnership to an LLP should be exempt from VAT provided it is a "transfer of a going concern". An LLP will need to register for VAT in the same way as a company.
Following the 2013 Budget, the Government is considering changes to the self-employed status of the members of LLPs, and restrictions on the variation of profit allocations within the LLP. These changes may make the taxation of LLP members more like employees of companies for some members. Any changes to the taxation of partnerships or LLPs will not take effect until at least 2014. However, if your business operates as an LLP please talk to us about how the structure could be changed if the tax changes prove to be hostile to LLPs.
How We Can Help You
Please talk to us if you would like any further advice on whether a Limited Liability Partnership would be a suitable trading vehicle for you. We can also assist in the formation of the Partnership.