Limited liability partnerships (LLPs) are partnerships registered with Companies House that offer the partners some protection against personal liability.
If you are involved in a partnership, an LLP agreement will give you a solid legal framework for your business relationship.
It is often the case that when a partnership is set up, those involved overlook the importance of a formal contract. While relationships are cordial and everyone is working towards a common goal, an official agreement may seem unnecessary.
However, over time, priorities may change, and different opportunities arise. Having a robust LLP agreement in place will ensure that each partner knows what is expected of them and what rights and responsibilities they have.
So, What is an LLP Agreement?
Limited liability partnerships were introduced in 2001 and are governed by the Limited Liability Partnerships Act 2000.
A limited liability partnership agreement sets out how issues will be dealt with between partners and how the partnership will be structured. For example, you can have salaried members, fixed share members and full equity members, each with different rights.
The legal requirements, such as registration and the filing of accounts, are similar to those required of a company, while taxation works in the same way as partnership taxation. Partners will need to register with HMRC and complete and file tax returns.
An LLP is an independent legal entity, and contracts can be entered into in its name.
While LLPs have traditionally been used by those offering professional services, they are becoming increasingly popular in other sectors. A minimum of two parties are needed to form the partnership. If the organisation only has one member, then after six months, liability will no longer be limited.
One of the parties can be a company or firm. There must be designated members who will be responsible for filing accounts and dealing with the partnership’s legal undertakings. An unlimited number of ordinary members can also belong to the partnership, as well as however many designated members you choose to have.
An LLP provides partners with protection similar to that offered by a limited company but allows the structure of a partnership. If you have an unlimited partnership, you can convert it to a limited partnership. This can be a complex process, and you are strongly advised to seek legal advice from an experienced limited liability partnerships solicitor.
Partners’ or members’ liability for debts is generally limited to the amount they invest unless they make a personal guarantee, and those involved can buy in or out of the business.
Why is an LLP Agreement Essential?
Without a formal agreement, disagreements and misunderstandings between partners may arise over time. These can become entrenched and have the potential to end a business. It is also the case that default rules apply to any limited liability partnership that does not have a written agreement in place, and these will not be tailored to your needs.
Putting an LLP agreement in place gives you the opportunity to talk through how you want to handle matters at an early stage. It will give you the protection of limited liability and allow the partnership to enter into contracts in its own name rather than in the individual names of the partners.
Key Clauses for an LLP Agreement
If you ask us to draft a limited liability partnership agreement on your behalf, we will work with you to establish how you want matters to be dealt with and draft a bespoke contract for the signature of all partners.
Key clauses generally contained in an LLP agreement include:
- The amount of investment to be made by members
- The type of membership each individual will have and who will be a designated member
- How an ordinary member can become a designated member
- How profits will be dealt with
- How liabilities will be shared
- What rights each member has, for example, to approve borrowing, make management decisions, voting rights and rights to sit on the management board
- How a new partner can join, for example, whether the consent of all of the existing partners is needed
- How the partnership can be ended
- How the death of a partner will be dealt with
- How the exit of a partner will be dealt with
- How partnership disputes will be handled, for example, a requirement to use professional dispute resolution before resorting to litigation
Contact our Company and Commercial Solicitors
If you are considering setting up a limited liability partnership or converting a partnership to an LLP, we will be happy to hear from you.
To speak to one of our expert limited liability partnership solicitors, ring us on 0330 173 3980, email us at info@witansolicitors.co.uk or fill in our contact form, and we will talk through your situation with you and discuss how we can assist.
