Brief Guide to LLP

A Limited Liability Partnership (LLP) allows for protection of its members as it is a corporate body which exists as its own legal ‘person’. The benefit of the LLP being its own legal ‘person’ is that any liabilities or debts of the LLP are the responsibility of the Company rather than the members themselves. This is of a great advantage to the members if the business unfortunately fails as they will not be liable personally except for what they have invested into the Company.

Individuals or other businesses can become members of a LLP. One restriction on a LLP is that it must have at least 2 members and fulfill the definition of a partnership, of it being a ‘commercial activity with a view to a profit’. Although it may be attractive for the members, due to a lack of liability, LLP’s aren’t seen as appropriate for charitable organisations.

All LLP’s should have an agreement in place, which is drafted to the entire member’s approval; this is normally referred to as the constitution of the Partnership. Failing an agreement being in place, the provisions of the 1890 Partnership Act will come into force. The 1890 Partnership Act has its shortcomings as any 120 year old piece of legislation will and therefore it can never been as substantial as a Partnership Agreement which is drafted to suit the preferences of the specific business. Some elements of the 1890 Act which will come into force in the absence of a Partnership Agreement are the sharing of profits equally between members and the equal participation in management.

A further benefit of an LLP being its own legal ‘person’ is that the members will not be liable for any debts if at some point the LLP becomes insolvent and is liquidated. Members will not have to contribute to the debt unless they have agreed to do so. It is possible, however, for members to be liable for a possible claw back of drawings up to a maximum of two years.

Another benefit of a LLP is that members do not become personally liable to a claim of negligence due to an act by another member of the LLP. Members are not totally free of any potential liability however as they may become personally liable for any negligent advice they themselves give.

Similarly to any other Partnership the members are bound by an implied duty of good faith. This duty will apply at all times.

The members of the LLP are placed under a fiduciary duty, this places the members under a duty to produce true accounts, not to carry out a competing business unless consent is received and not to benefit solely from the LLP’s assets, name or goodwill.

Accounts must be filed with Companies House every year. LLP’s are required to abide by strict accounting standards and they must be periodically audited. Failure to abide by these obligations will lead to sanctions.

Every LLP must have two ‘designated members’. These are members who have the role of performing the filing and administrative duties for the LLP.

At it’s inception an LLP must register an incorporation document which will include: -

(1)          the names and addresses of its members

(2)          the name of the LLP

(3)          and the location and address of the registered office.

If an individual is to be appointed as a member of the partnership, the registrar is to be notified within 14 days.

If a member wants to leave the LLP, they can do so with the agreement of the other members or by giving reasonable notice. If a member suddenly passes away, they will then cease to be a member.