A Limited Liability Partnership (‘LLP’) is an alternative corporate business vehicle that combines the flexible structure of a partnership with the benefits for its partners (or “members”) of limited liability.
LLPs are relatively new entities, the legislation creating them having come into existence in April 2001.
Some of the key features of LLPs are:
- They are a separate legal entity from their members.
- They have the benefit of limited liability for their members.
- They are taxed as a partnership.
- They have the organisational flexibility of a partnership.
- Any agreement (“LLP agreement”) between the members governing the operation of the LLP is a private document which is confidential to the members.
- They must have at least two “designated” members.
- Their “trading disclosure” requirements are similar to those of a company.
- They must be registered at Companies House.
- Their accounting and filing requirements are similar to those of a company.
- They have the ability to create floating charges.
A separate legal entity
An LLP is a separate legal entity from its members. On incorporation it will be issued with a unique registration number by Companies House, in the same way as a limited company. This registration number will stay the same throughout the lifetime of the LLP, even if the LLP changes its name. Very similar restrictions apply to names that can be registered for LLPs as apply to limited companies.
An LLP itself has unlimited capacity and it can do anything that a natural person can do, including holding property, entering into contracts, suing and being sued.
Changes in the membership of an LLP do not affect its continued existence. However, it should be noted that if the membership of the LLP falls below two Members, and the LLP continues to trade for more than 6 months with just one Member, the benefits of limited liability are lost.
Limited liability
The members of an LLP act as its agents and only have liability up to the amount they have contributed to the LLP – in particular their capital contribution and undrawn profits. This is a significant advantage over a traditional partnership where the partners generally have unlimited liability.
However, there are certain circumstances in which the personal liability of a member may be extended.
These include:
- Negligence - if a member is negligent and a third party suffers loss as a result then the third party could try to take action against that individual member as well as the LLP. However, any such action would undermine the principle of limited liability and the Courts are generally reluctant to find individual members liable for their own negligence.
- Wrongful/fraudulent trading - wrongful and fraudulent trading provisions apply to LLPs in substantially the same way that they apply to limited companies. If the members of an LLP (a) allowed the LLP to continue trading after they knew (or ought to have known) that it had no reasonable prospect of avoiding insolvency; or (b) allowed it to continue trading with a view to defrauding creditors, they may be personably liable. The degree to which each member was involved and the degree of control in the business will both be relevant.
- The penalties are potentially unlimited and any individual may be ordered to make such contribution "as the Court thinks proper".
- Insolvency clawbacks – provisions relating exclusively to LLPs allow for a clawback of any "withdrawals" (including drawings, loan repayments and property distributions) by a member during the two years prior to an LLP becoming insolvent. Again, the Court has discretion in this area.
- Personal guarantees - anyone lending money to an LLP may still require personal guarantees from the members, as they frequently do with directors/shareholders of a company. Members should check the provisions of their members’ agreement to see if the LLP gives an indemnity to its members for such a guarantee or that the liability will be shared with the other members.
Taxation
Although treated as a separate legal entity from its members, the LLP is treated for tax purposes as a partnership and the members are taxed as partners, each being liable for tax on their share of the income or gains of the LLP.
Organisational flexibility
An LLP has the organisational flexibility of a partnership and the provisions dealing with the day to day running of the LLP will normally be contained in a written LLP agreement. An LLP agreement will typically deal with matters such as:
- Profits and losses.
- Drawings.
- Ownership of property.
- Meetings/decision making.
- Admission of new members.
- Retirement/expulsion of members.
- Indemnities and insurance.
- Restrictive covenants.
Any written LLP agreement is a private document which is confidential to the members.
Designated members
An LLP must have at least two “designated” Members. Designated members have particular responsibilities and functions within the LLP which closely reflect those duties that would normally be carried out by a director or secretary of a company.
They include:
- Appointing an auditor (where appropriate).
- Signing the LLP’s annual accounts and delivering them to Companies House.
- Preparing, signing and delivering the LLP’s annual return to Companies House.
- Notifying Companies House of any changes to the LLP’s membership, name or registered office address.
- Acting on the LLP’s behalf if it is wound up or dissolved.
If the number of designated members falls below two then every member of the LLP is automatically deemed to be a designated member.
Disclosure requirements
Every LLP must paint or affix its name on the outside of every office or place of business (even if it is a member’s home), in a conspicuous position and in legible letters. The LLP’s name should also appear, in a legible form, on a number of business documents including:
- Business letters and order forms.
- Notices and other official publications.
- Websites.
- Cheques, invoices and receipts.
In addition, all business letters and order forms of the LLP, and all of the LLP’s websites, must specify the following in legible letters:
- The place of registration and registered number.
- The registered office address
- In the case of an LLP whose name ends with the abbreviation "llp" or "LLP", the fact that it is a limited liability partnership.
Failure to comply with any of these statutory requirements may result in a fine for the LLP and/or for all Members in default.
Accounting and filing requirements
LLPs are required to provide financial information similar to that required of companies. Examples of the documents that an LLP must file at Companies House include:
- An annual return.
- Annual accounts.
- Notification of changes to the LLP’s membership, including changes to a member’s status (from member to designated member or vice versa).
- Notification of changes to the registered office address.
- Details of any mortgage or charge created by the LLP.
Failure to file annual accounts on or before the due date will result in a fine being imposed by Companies House. Failure to file an annual return will result in the LLP being struck off the register at Companies House.
Floating charges
An LLP may issue debentures and give fixed charges and floating charges over its assets in the same way as a company.
Please get in touch with our corporate lawyers if you need legal guidance for your business.
