To LLP or not to LLP: that is the question
At their inception Limited Liability Partnerships (LLPs) were intended for use by professional partnerships such as solicitors and accountants. Now, however, they are being used in joint ventures, holding companies, investment companies and property developers. So what has made this ‘hybrid’ form of company so attractive?
Characteristics of an LLP
An LLP is a partnership with an outer shell of limited liability. It can enter into contracts in its own name, survive after losing a partner, grant floating charges over its assets, and there is no restriction on how many members an LLP can have unlike a traditional partnership. Further, unlike a limited company there is no Memorandum or Articles of Association so an LLP is extremely flexible. LLPs must have a registered office and the names and addresses of all members must be registered at Companies House. Applications can be made for this information to be kept secret in special circumstances. LLPs must file audited accounts prepared in accordance with the Companies Act 1985 and generally accepted accounting practice, although some smaller LLPs may file abbreviated accounts and claim audit exemption.
Liability of an LLP member
The liability of a member is limited to their capital in the firm. However, in certain circumstances sums withdrawn in the two years prior to insolvency can be clawed back. Where a claim is made against a member who is personally at fault (for example in a claim for negligence), he should be protected by the limited liability unless he accepted a personal duty of care or a personal contractual obligation.
A Member’s Agreement is a must
It is strongly recommended that an LLP should have a members’ agreement. This is a private document and does not need to be submitted to Companies House. If a members’ agreement is not drawn up there are default provisions provided in the LLP regulations but these are not appropriate for most businesses. An LLP does not have a share capital and one of the matters that the members’ agreement needs to address is the level of capital contributions from members. A member’s agreement needs to cover every eventuality and will need to deal with aspects of company law and the Insolvency Act 1986.
Taxation and LLPs
Whilst an LLP is a hybrid, a mix of company and partnership, for tax purposes it is treated like a general partnership, i.e. the members are taxed on their individual share of profits or capital gains. The entity itself is not taxed on its profits.
Flexibility
One of the key aspects is that the internal flexibility of a general partnership is maintained within an LLP. The introduction and retirement of members and alternations of profit shares and capital contributions are very easy to arrange and have minimal tax and legal consequences. LLPs are not restricted to professional firms and are an intriguing and favourable new structure for various business situations. If you wish to know more about whether an LLP is the right vehicle for your business please contact James Lamont or Rachael Taylor.
James Lamont, Partner Company Commercial Department
