Limited Liability Partnerships
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A Limited Liability Partnership (LLP) is a new form of
legal entity introduced on 6th April 2001 and is neither a company nor a
partnership. It has its own legal personality just like a limited company and
has unlimited legal capacity, e.g. to own property, employ staff, sue and be
sued, create floating charges and join in other business enterprises such as
being a partner in a partnership.
LLPs have mainly appealed to larger professional partnerships
that want the protection of limited liability for the negligence of other
partners but maintaining the flexibility of the partnership set up. It can
however prove useful for other smaller businesses and some joint ventures.
LLPs and their Members
Any person, including a company, can be a member of an LLP. There must be at
least two members but there is no maximum.
At least two members have to be "designated members" and have
certain responsibilities for signing and filing documents. If none are
designated by the partnership or the number of designated members falls below
two, then all the members become designated.
Comparison with Limited Companies
- An LLP exists when a Certificate of Registration is issued.
However, it does not need a Memorandum and Articles of Association.
- The rules for names of LLPs follow those of companies,
and they need to have a registered office.
- Designated members are a bit like directors of a company, and
have administrative and accounting/auditing functions.
- Many of the restrictions on company directors do not apply,
e.g. disclosure of personal dealings, limits on service contracts,
restrictions on substantial property transactions, restrictions on loans.
- Annual Returns need to be filed, as do audited Accounts
showing a true and fair view under UK accounting principles, although smaller
LLPs are exempt form an audit as for smaller companies. The accounts will be
publicly available through Companies House. Annual General Meetings are not
required.
- An LLP can create a floating charge over its assets, like a
company.
- On insolvency, the usual routes available for companies are
followed, i.e. voluntary arrangement, receivership, administration or winding
up.
Comparison with Partnerships
- An LLP is not strictly a partnership, and it is expressly
provided that partnership law does not apply to an LLP.
- Both a partnership and an LLP must relate to a venture
intended for profit, so neither is suitable for use by a charitable body.
- For partnerships, every partner is an agent of the
partnership and of the other partners, while with LLP's every member is an
agent of the LLP itself, but not of other members. A member owes a fiduciary
duty to the body corporate, but not to the other members.
- Like partners, members are not automatically employees of the
LLP, although it is open for them to be made expressly employees (like
salaried partners in a partnership).
- Members of an LLP can join or leave an LLP with the same
flexibility as joining or leaving a partnership, without the problem of
dealing with company share issues or transfers.
- Agreements to govern members' relationships with the LLP
remain private, like partnership agreements. However, an LLP must publish its
Accounts.
- An LLP has no share capital and there are no capital
maintenance requirements.
- Most importantly, individual members of an LLP will not be
liable for its negligence (unless they themselves cause it), and they will not
generally be personally liable to creditors of the LLP over and above their
capital share in the LLP, in the event of insolvency.
- For tax purposes, LLP members will be treated in almost
exactly the same way as if they were partners in a partnership. The LLP is
transparent for tax purposes and the members are subject to income tax on
their profit shares, and capital gains on their share of any gains made by the
LLP.
Formation Procedures
"Two or more persons associated with carrying on a lawful business with a view
to profit" can incorporate an LLP.
They will need to sign and file Form LLP2 at Companies House
with the relevant fee (initially £95). The usual Companies House rules on
company names apply. LLP2 specifies the registered office, and the names of the
members. A registration certificate is issued by Companies House.
New Members
New members may be added at any time, in accordance with any
agreement between the members. Form LLP288a is filed at Companies House.
Ceasing to be a Member
A person ceases to be a member if he dies or is dissolved. He
can cease to be a member by agreement with the other members. In default he can
terminate his membership by giving "reasonable notice". Form LLP288b has to be
filed at Companies House.
Minimum Membership
There must be at least two members. If business is carried on
for more than six months with only one member, the remaining member becomes
jointly and severally liable with the LLP for debts incurred after the six month
period.
Designated Members
An LLP has to have at least two designated members, who would normally be
appointed by agreement with the other members. In default, all members become
designated. Designated members appoint auditors, sign the Accounts, deliver them
to Companies House, notify Companies House of changes and sign and deliver the
Annual Return.
Winding Up
On insolvency, the usual routes available for companies are
followed, i.e. voluntary arrangement, receivership, administration or winding
up. Members can be responsible for preferences or wrongful trading, or a new
obligation to "repay withdrawals" taken within 2 years of insolvency at a time
when the LLP was unable to pay its debts (subject to court discretion).
Relationships within the LLP
Every member is an agent of the LLP, but they are not agents
of each other. Members do not owe duties of good faith to each other.
However, by way of default regulations, a member must account to
the LLP for any profits made by him in a business carried on by him, if that
business competes with the LLP and is carried on without the consent of the LLP.
Also, a member must account to the LLP if without its consent he derives a
benefit from any transaction which concerns the LLP or makes use of its
property, name or business connection.
Default Regulations
The rights and duties of the members will be governed by any
agreement between them, or in the absence of agreement, by default regulations.
The default regulations are:
- All members share equally in capital and profits
- Members have an indemnity from the LLP for liabilities from
ordinary activities
- All members may participate in the LLP's management
- No members are entitled to remuneration from the LLP
- New members need unanimous consent
- A simple majority can decide anything, except a change in the
nature of the LLP's business which requires unanimity
- The LLP's books are to be kept at its place of business and
available to all members
- Each member must provide true accounts and full information
concerning the LLP to the other members
- Expulsion is impossible without express provision
- A member may retire at any time on giving notice
Written Members Agreements
Even though there are default regulations, in practice it
will be important for members to enter into an effective agreement before
incorporating an LLP.
A properly drafted agreement should take into account the
following issues:
- Capital contributions and withdrawals
- Shares of profits and losses
- Basis for preparing accounts and establishing profits
- Any special rights of members
- Voting rights of members and procedures for meetings
- Management of the LLP
- Transfer of members' interests
- New members
- Retirement and expulsion
- Competition from members or recent members
- Winding up
- Dispute resolution
- Disapplying statutory rules (e.g. s.459 Companies Act so that
a member cannot claim unfair prejudice under that section)
Relationship with Third Parties
Every member is an agent capable of binding the LLP in its
relations with third parties.
An LLP will not be bound by anything done by a member dealing
with a third party if the member has no actual authority and the third party
knows this or does not realise he is a member of the LLP.
Where a member of an LLP is liable to a third party for anything
done in the course of the LLP's business, e.g. an act of negligence, then the
LLP is liable to the same extent as the member. The other members will not be
liable.
Contracts and Documents
The same formalities apply to contracts entered into by LLP's
as apply to companies, i.e. contracts can be made under seal or in writing by
persons with authority. An LLP need not have a common seal. A document signed by
two members and expressed to be executed by the LLP is equivalent to executing
under seal.
Debentures/Charges
An LLP can create a debenture or floating charge or other
charge. The usual rules as to registration at Companies House apply.
Business Identification
An LLP's name must appear on every place of business. The
name must appear on all documentation. It must also state its place of
registration and registered number, its registered office and the fact that it
is a limited liability partnership.
Annual Returns
An Annual Return has to be filed every year, as for a
company, with details of the members.
Accounts and Auditing
The LLP Act incorporates the majority of the
accounting/auditing provisions of the Companies Act. Thus, accounting records
have to be kept. An LLP has to prepare Accounts for accounting periods ending on
accounting reference dates. However, only designated members need to approve the
Accounts, unless otherwise agreed, and there is no need for a directors' report.
There must be an auditors' report. Accounts have to be circulated to all members
and filed at Companies House within the ten month limit for private companies.
There are exemptions for small and medium sized LLP's, in particular from the
requirement for an audit. Accounts do not have to be laid before members at a
meeting, as there are no automatic AGM's.
Tax Treatment
The aim of the tax regime is for LLP's to achieve tax
neutrality for those converting an existing partnership into an LLP. For income
and corporation tax purposes, including capital gains, an LLP is treated as
being carried on by its members and members will be individually taxed on their
profit shares or gains.
It is possible that an LLP could become liable for tax if it
ceases to carry on any trade or business, or ceases to carry on a trade with a
view to profit. It will then be taxed as a company. It is not a suitable
business vehicle for venture capitalists or other entities not themselves
carrying on a business.
There is no tax payable on any disposal on transfer of the
assets of a partnership into the name of an LLP and no changes in base value
should occur.
Stamp duty exemption should apply to the transfer of property
from an existing partnership into an LLP if the transfer takes place within a
year of incorporation. The identity of the partners in the old partnership and
the members in the LLP must be the same. Further, their proportionate beneficial
interests in the property must be the same, or if there are any changes these
must not have arisen for avoidance purposes. Any exempt transfer will still need
to be denoted as not chargeable.
A transfer of property from an existing partnership to an LLP
should be exempt from VAT provided it is a "transfer of a going concern". An LLP
will need to register for VAT in the same way as a company.
How we can help you
Please talk to us if you would like any further advice on
whether a Limited Liability Partnership would be a suitable trading vehicle for
you. We can also assist in the formation of the Partnership.
About the Author
Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of
A M P Associates –
A specialist firm of chartered certified accountants and tax advisers based in
London and Surrey. Jonathan advises on a wide range of business and tax issues
and he is recognized for his proactive and innovative approach to taxation.
Jonathan can be contacted on 0845 009 8845 or email:jonathan@ampassociates.co.uk
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Article Published/Sorted/Amended on Scopulus 2008-04-10 10:13:39 in Business Articles
