Limited Liability Partnerships
Since the Limited Liability Partnership structure became available for use in England and Wales following the Limited Liability Partnership Act 2000 (LLP Act) it has proved very popular as the corporate structure adopted by many business partners, especially professional partnerships.
Since the Limited Liability Partnership structure became available for use in England and Wales following the Limited Liability Partnership Act 2000 (LLP Act) it has proved very popular as the corporate structure adopted by many business partners, especially professional partnerships. It provides a hybrid between features usually associated with a company (such as registration at Companies House and limited liability) and features more normal in an unregistered and unlimited partnership (a partnership taxation regime and any Membership Agreement is a private document, not publicly registered.)
In an LLP the partners are called Members or Partners, and each has a limit on their personal liability, as they would with a company limited by shares, and does not have to pay the debts of the LLP. The LLP is taxed like a partnership which may be preferable to some business owners than having the business taxed as a limited company.
It is possible to simply register a new LLP and its members or to register new members joining an existing LLP. In theory it is not necessary to have a formal agreement between the Members as the LLP Act provides the “Default Rules” which set out the legal terms of the LLP where the Members have not reached their own agreement. However, in practice we would not advise it as these Default Rules have over the last 13 years proved problematic in several different ways: Some of the Default Rules provide inappropriate answers on some issues whilst providing no answers at all on other issues.
If you join an LLP without a Membership Agreement, the Default Rules mean you automatically:
- Have an equal share in ownership of the capital
- Are entitled to an equal share of the profits
- Must contribute an equal share of the losses
- Cannot be forced out of the LLP
- Can decide to leave the LLP but if you do you do not have any way of getting your share of the assets/ capital value out of the LLP
Problem: If each of the Members/ Partners is contributing equal amounts of money, talent and time and effort then the equal shares of capital, profits and losses may be acceptable. However, in real businesses as we know the dynamics between the Members/ Partners will be more complex, which each contributing in different ways or amounts and needing a different type or level of return on their contribution or investment.
Problem: In our experience all business owners who have partners in a business would want to be able to force one of these partners out if certain situations arose such as if that partner behaved in such a way as to threaten or undermine the business or refused or were not available to contribute their work or time for long periods.
Problem: Given that exit strategies are key to the planning of business owners, an exit strategy that allows you to leave a business partnership but does not provide a way to take out your share of the value of the business or to sell your share to the remaining partners or a newcomer, would be utterly unacceptable.
Solution to these and other Default Rule problems: Ensure that you have a written Membership Agreement in place to control the relationship between you and the other Members/ Partners in the LLP. This Membership Agreement should reflect the dynamics between the Members/ Partners in your particular LLP; any needs particular to businesses in your sector; the shared values, and aspirations of the Members/ Partners; clear exit routes which allow the departing Member/ Partner to realize the value of their share and we would also advise that the Membership Agreement should means to rid the LLP of a Member if the need arises and clearly sets out when that would occur.
We work with our clients to ensure that they have Membership Agreements which properly reflect the needs of their businesses, and avoid the need to have important issues decided by the courts in the event of disputes.
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