What is a limited liability partnership (“LLP”)?
Since the Limited Liability Partnership Act 2000 it has been possible to create an LLP as a business entity. The main reasoning behind this type of entity is that it allows the members to operate in a way that is largely similar to a partnership but with greater formality and also greater limitation on the potential liability that each partner (or member) is subjected to. LLPs have proved particularly popular with professional service firms that tended to operate as traditional partnerships such as lawyers and accountants as it limits the liabilities of the individual members without placing them under the rigidity of a limited company.
Key Features of a Limited Liability Partnership
The main reasoning behind the creation of the LLP was that it allowed partners to limit their liability whilst still retaining the tax and accounting flexibility associated with partnerships. Based on this the key features are that the LLP is deemed a separate legal entity with limited liability being afforded to its members. Despite this it is still taxed as a partnership would be meaning that each individual member will do their own tax return and pay personal tax on the profits rather than corporation tax as would be the case in a limited company.
Another key feature is the fact that the organisation and structure is as flexible as a partnership and any agreement between the partners (in the form of an LLP agreement) is a private document. LLPs do; however, have to submit their details to Companies House and are also subject to annual filing duties.
Incorporating an LLP
In order to incorporate an LLP it is necessary for the prescribed form to be completed and sent to Companies House. This form is very similar in essence to the forms and details required for a limited company. Careful consideration needs to be given as to the name of the LLP as this must not be the same as a name that has already been registered and must not contain any of the prohibited phrases such as ‘Royal’.
Other information such as the registered address must also be included. All members must be declared including information such as date of birth, name and residential address. It is possible for a limited company to be a member of the LLP and in this case it is therefore necessary to include all of their details including date of incorporation and address. Every member will have to sign the registration form signifying their consent to act as members of the LLP.
Members of an LLP
A member of an LLP is defined as being someone who has subscribed to the original registration document as stated above, or who has entered into an agreement with the existing members to become a member. Members can be individuals or bodies corporate but they must not be disqualified from acting as directors (the criteria laid out for disqualification of directors equally applies to the disqualification of members).
Typically a member will leave the partnership when he dies or becomes unable to act or when his partnership arrangement is terminated. Care needs to be taken here as an LLP cannot exist with just one member and therefore a new member needs to be appointed before one is terminated. Equally provisions need to be put in the partnership agreement to ensure that the LLP survives the death of one of the members if there are only two members and survival is intended. There is no prescribed maximum number of members although it is common for the individual partnership agreements to contain a maximum purely from an administrative point of view. For administrative ease it is possible for the LLP to have designated members who are able to make decisions and sign documents on behalf of the LLP.
Other Issues for a LLP
Filing Obligations for an LLP
An LLP is largely subjected to the same filing requirements as a limited company and this needs to be considered as an additional administrative burden that now faces the entity. Factors such as a new member joining or an old member leaving must be notified to Companies House.
Similarly annual returns and accounts must also be filed at Companies House as well as any changes to the registered address of the LLP itself or the residential addresses of the members.
When things go wrong in the LLP
Difficulties can arise within the LLP structure much in the same way as it can arise in any other business entity. One of the main difficulties is that of automatic dissolution of the partnership should the number of members reduce to one. To prevent this from happening the partnership agreement should contain provisions to ensure survivorship of the LLP. Furthermore there should be a clear dispute resolution process in place to deal with any internal disputes within the partnership as well as the exit provisions in terms of valuations of assets and appointment of alternative members.
Reasons to Consider an LLP
- Retain the accountancy and taxation flexibility associated with a traditional partnership
- Limit the individual liabilities of the members of the partnership
- Different members can have different rights associated to their membership giving flexibility of internal structure