Limited Liability Partnerships (LLPs) — overview

This overview provides an insight into limited liability partnerships rather than general partnerships or limited partnerships.

Introduction

Created by the Limited Liability Partnership Act 2000 (Act) a LLP is a body corporate that gives members the benefit of limited liability but allows the flexibility of a general partnership.

A LLP is a vehicle for two or more persons intending to carry on a lawful business with a view to a profit. Individuals within a LLP are known as members rather than partners. Partnership law does not generally apply to LLPs.

A LLP has its own legal identity and can:

• enter into contracts

• grant a floating charge or debenture

• sue or be sued, and

• hold property

A LLP is responsible for its liabilities whilst each member's liability will, generally, be limited to the amount that he has agreed to contribute. The limited liability protection may be lifted where members have:

• given personal guarantees, or

• been found to be:

• • negligent, or

  • guilty of wrongful or fraudulent trading

If the LLP membership falls to one the LLP may continue to carry on business for six months after which the benefits of limited liability will be lost and the member will become jointly and severally liable with the LLP for all debts and liabilities incurred during and after that period.

Partnership name, incorporation and stationery

There are restrictions on which names can be used for a LLP. The name should not be offensive or similar to an existing LLP or company name and must have 'Limited Liability Partnership' or 'LLP' as a suffix (or the relevant Welsh equivalent, as necessary).

To incorporate a LLP an application needs to be filed with the Registrar of Companies (Registrar) in a prescribed form. The form sets out the:

• LLP's name

• LLP's registered office, and

• name, address and date of birth of each member of the LLP including which of the members are classified as 'designated members'.

On receipt of the appropriate form and fee the Registrar will issue a certificate of incorporation. The certificate is conclusive evidence that the formalities for establishing a LLP have been complied with.

LLP documentation and media must bear the full name of the LLP including the relevant suffix; certain documentation and media must also state the place of registration, registered number and the registered office.

Members, authority and status

Both individuals and corporate bodies may be members of a LLP. The minimum number of members for the LLP to carry on a business being two with no maximum limit.

Every member is an agent of the LLP. The LLP will not be bound by anything done by a member on its behalf if:

• the member had no authority, and

• the third party with whom the member is dealing either:

• • knows such member had no authority to act, or

  • does not know or believe the individual with whom he is dealing is a member of the LLP in the first place

Although there are no directors or shareholders of a LLP, a member is subject to the Company Directors Disqualification Act 1986 and may under that legislation be disqualified from being a member of a LLP.

Each LLP must have a minimum of two designated members, the details of which will be contained in the incorporation document. Any changes to the designated members (or there details) will need to be filed with the Registrar. Until an appropriate filing is made all members will be designated members. Designated members generally ensure that certain requirements in the LLP legislation are met, including:

• appointing auditors

• notifying the Registrar of changes to the LLP membership, and

• notifying the Registrar of changes to the registered office.

Failure to carry out these and other duties may result in a criminal offence or a fine.

An ex-member is liable to a third party dealing with the LLP for acts and omissions occurring until the third party has had notice of the cessation of his membership or notice of the cessation of membership has been filed with the Registrar.

The Agreement and default provisions of the Act

As a LLP has no memorandum and articles of association the members are free, subject to the Act, to regulate the LLP as they see fit. The LLP will usually be governed by a written agreement, that may already be in existence before incorporation. The agreement may, amongst others matters, deal with:

• profit sharing

• duration

• termination, and

• the exit and expulsion of partners.

The agreement is a private document and there is no requirement to file it with the Registrar. Where there is no agreement, the Act and associated regulations set out default provisions as to how a LLP is run. The default provisions do not generally offer adequate solutions to many of the problems that may arise and may not suit the manner in which members wish to run their business, these default provisions include that all members:

• may be involved in the management of the LLP

• are entitled to equal shares in the capital and profits, and

• must consent to a change in the nature of the business of the LLP

Conversion to a LLP

An existing general partnership wishing to convert into a LLP must establish a LLP and enter into a transfer agreement to transfer the existing business and assets. When converting the business of a general partnership into a LLP other matters to consider are:

• the provisions of the existing partnership agreement

• pre-transfer liabilities

• the application of the Transfer of Undertakings (Protection of Employment) Regulations

• personal guarantees

• third party consents, and

• the tax and accounting implications of the conversion

Accounts and tax

LLPs must produce and publish accounts, generally equivalent to those produced by a similar sized limited company. The accounts and an annual return will be filed with the Registrar.

As a LLP is tax transparent, the earnings of a LLP are taxed as a general partnership ie for members who are individuals each member is taxed individually on their own income or gains, rather than using corporation tax rates. If a LLP member is another business such member will usually be liable to pay corporation tax on any income received from the LLP.