| Limited Liability Partnerships (LLP) | | | | However, by way of default regulations, a member |
| A Limited Liability Partnership (LLP) is a new form of | | | | must account to the LLP for any profits made by him |
| legal entity introduced on 6th April 2001 and is neither a | | | | in a business carried on by him, if that business |
| company nor a partnership. It has its own legal | | | | competes with the LLP and is carried on without the |
| personality just like a limited company and has unlimited | | | | consent of the LLP. Also, a member must account to |
| legal capacity, e.g. to own property, employ staff, sue | | | | the LLP if without its consent he derives a benefit |
| and be sued, create floating charges and join in other | | | | from any transaction which concerns the LLP or |
| business enterprises such as being a partner in a | | | | makes use of its property, name or business |
| partnership. These LLPs can be formed with the help | | | | connection. |
| of a Chartered Accountants in Liverpool. | | | | Default Regulations |
| LLPs have mainly appealed to larger professional | | | | The rights and duties of the members will be governed |
| partnerships that want the protection of limited liability | | | | by any agreement between them, or in the absence |
| for the negligence of other partners but maintaining the | | | | of agreement, by default regulations. |
| flexibility of the partnership set up. It can however | | | | The default regulations are: |
| prove useful for other smaller businesses and some | | | | 1.All members share equally in capital and profits |
| joint ventures. | | | | 2.Members have an indemnity from the LLP for |
| LLPs and their Members | | | | liabilities from ordinary activities |
| Any person, including a company, can be a member of | | | | 3.All members may participate in the LLP's |
| an LLP. There must be at least two members but | | | | management |
| there is no maximum. | | | | 4.No members are entitled to remuneration from the |
| At least two members have to be "designated | | | | LLP |
| members" and have certain responsibilities for signing | | | | 5.New members need unanimous consent |
| and filing documents. If none are designated by the | | | | 6.A simple majority can decide anything, except a |
| partnership or the number of designated members falls | | | | change in the nature of the LLP's business which |
| below two, then all the members become designated. | | | | requires unanimity |
| Comparison with Limited Companies | | | | 7.The LLP's books are to be kept at its place of |
| ¦An LLP exists when a Certificate of Registration is | | | | business and available to all members |
| issued. However, it does not need a Memorandum and | | | | 8.Each member must provide true accounts and full |
| Articles of Association. | | | | information concerning the LLP to the other members |
| ¦The rules for names of LLPs follow those of | | | | 9.Expulsion is impossible without express provision |
| companies, and they need to have a registered office. | | | | 10.A member may retire at any time on giving notice |
| ¦Designated members are a bit like directors of a | | | | Written Members Agreements |
| company, and have administrative and accounting | | | | Even though there are default regulations, in practice it |
| auditing functions. | | | | will be important for members to enter into an |
| ¦Many of the restrictions on company directors do | | | | effective agreement before incorporating an LLP. |
| not apply, e.g. disclosure of personal dealings, limits on | | | | A properly drafted agreement should take into |
| service contracts, restrictions on substantial property | | | | account the following issues: |
| transactions, restrictions on loans. | | | | 1.Capital contributions and withdrawals |
| ¦Annual Returns need to be filed, as do audited | | | | 2.Shares of profits and losses |
| Accounts showing a true and fair view under UK | | | | 3.Basis for preparing accounts and establishing profits |
| accounting principles, although smaller LLPs are | | | | 4.Any special rights of members |
| exempt form an audit as for smaller companies. The | | | | 5.Voting rights of members and procedures for |
| accounts will be publicly available through Companies | | | | meetings |
| House. Annual General Meetings are not required. | | | | 6.Management of the LLP |
| ¦An LLP can create a floating charge over its assets, | | | | 7.Transfer of members' interests |
| like a company. | | | | 8.New members |
| ¦On insolvency, the usual routes available for | | | | 9.Retirement and expulsion |
| companies are followed, i.e. voluntary arrangement, | | | | 10.Competition from members or recent members |
| receivership, administration or winding up. | | | | 11.Winding up |
| Comparison with Partnerships | | | | 12.Dispute resolution |
| ¦An LLP is not strictly a partnership, and it is | | | | 13.Disapplying statutory rules (e.g. s.459 Companies Act |
| expressly provided that partnership law does not apply | | | | so that a member cannot claim unfair prejudice under |
| to an LLP. | | | | that section) |
| ¦Both a partnership and an LLP must relate to a | | | | Relationship with Third Parties |
| venture intended for profit, so neither is suitable for use | | | | Every member is an agent capable of binding the LLP |
| by a charitable body. | | | | in its relations with third parties. |
| ¦For partnerships, every partner is an agent of the | | | | An LLP will not be bound by anything done by a |
| partnership and of the other partners, while with LLP's | | | | member dealing with a third party if the member has |
| every member is an agent of the LLP itself, but not of | | | | no actual authority and the third party knows this or |
| other members. | | | | does not realise he is a member of the LLP. |
| ¦Like partners, members are not automatically | | | | Where a member of an LLP is liable to a third party |
| employees of the LLP, although it is open for them to | | | | for anything done in the course of the LLP's business, |
| be made expressly employees (like salaried partners in | | | | e.g. an act of negligence, then the LLP is liable to the |
| a partnership). | | | | same extent as the member. The other members will |
| ¦Members of an LLP can join or leave an LLP with | | | | not be liable. |
| the same flexibility as joining or leaving a partnership, | | | | Contracts and Documents |
| without the problem of dealing with company share | | | | The same formalities apply to contracts entered into |
| issues or transfers. | | | | by LLP's as apply to companies, i.e. contracts can be |
| ¦Agreements to govern members' relationships with | | | | made under seal or in writing by persons with authority. |
| the LLP remain private, like partnership agreements. | | | | An LLP need not have a common seal. A document |
| However, an LLP must publish its Accounts. | | | | signed by two members and expressed to be |
| ¦An LLP has no share capital and there are no capital | | | | executed by the LLP is equivalent to executing under |
| maintenance requirements. | | | | seal. |
| ¦Most importantly, individual members of an LLP will | | | | Debentures/Charges |
| not be liable for its negligence (unless they themselves | | | | An LLP can create a debenture or floating charge or |
| cause it), and they will not generally be personally liable | | | | other charge. The usual rules as to registration at |
| to creditors of the LLP over and above their capital | | | | Companies House apply. |
| share in the LLP, in the event of insolvency. | | | | Business Identification |
| ¦For tax purposes, LLP members will be treated in | | | | An LLP's name must appear on every place of |
| almost exactly the same way as if they were | | | | business. The name must appear on all documentation. |
| partners in a partnership. The LLP is transparent for | | | | It must also state its place of registration and |
| tax purposes and the members are subject to income | | | | registered number, its registered office and the fact |
| tax on their profit shares, and capital gains on their | | | | that it is a limited liability partnership. |
| share of any gains made by the LLP. | | | | Annual Returns |
| Formation Procedures | | | | An Annual Return has to be filed every year, as for a |
| "Two or more persons associated with carrying on a | | | | company, with details of the members. |
| lawful business with a view to profit" can incorporate | | | | Accounts and Auditing |
| an LLP. | | | | The LLP incorporates the majority of the accounting |
| They will need to sign and file Form LLP2 at | | | | auditing provisions of the Companies Act. Thus, |
| Companies House with the relevant fee. The usual | | | | accounting records have to be kept. An LLP has to |
| Companies House rules on company names apply. | | | | prepare Accounts for accounting periods ending on |
| LLP2 specifies the registered office, and the names of | | | | accounting reference dates. However, only designated |
| the members. A registration certificate is issued by | | | | members need to approve the Accounts, unless |
| Companies House. | | | | otherwise agreed, and there is no need for a directors' |
| New Members | | | | report. There must be an auditors' report. Accounts |
| New members may be added at any time, in | | | | have to be circulated to all members and filed at |
| accordance with any agreement between the | | | | Companies House within the ten month limit for private |
| members. Form LLP288a is filed at Companies House. | | | | companies. There are exemptions for small and |
| Ceasing to be a Member | | | | medium sized LLP's, in particular from the requirement |
| A person ceases to be a member if he dies or is | | | | for an audit. Accounts do not have to be laid before |
| dissolved. He can cease to be a member by | | | | members at a meeting, as there are no automatic |
| agreement with the other members. In default he can | | | | AGM's. |
| terminate his membership by giving "reasonable notice". | | | | Tax Treatment |
| Form LLP288b has to be filed at Companies House. | | | | The aim of the tax regime is for LLP's to achieve tax |
| Minimum Membership | | | | neutrality for those converting an existing partnership |
| There must be at least two members. If business is | | | | into an LLP. For income and corporation tax purposes, |
| carried on for more than six months with only one | | | | including capital gains, an LLP is treated as being |
| member, the remaining member becomes jointly and | | | | carried on by its members and members will be |
| severally liable with the LLP for debts incurred after | | | | individually taxed on their profit shares or gains. |
| the six month period. | | | | It is possible that an LLP could become liable for tax if |
| Designated Members | | | | it ceases to carry on any trade or business, or ceases |
| An LLP has to have at least two designated | | | | to carry on a trade with a view to profit. It will then be |
| members, who would normally be appointed by | | | | taxed as a company. It is not a suitable business |
| agreement with the other members. In default, all | | | | vehicle for venture capitalists or other entities not |
| members become designated. Designated members | | | | themselves carrying on a business. |
| appoint auditors, sign the Accounts, deliver them to | | | | There is no tax payable on any disposal on transfer of |
| Companies House, notify Companies House of | | | | the assets of a partnership into the name of an LLP |
| changes and sign and deliver the Annual Return. | | | | and no changes in base value should occur. |
| Winding Up | | | | Stamp duty exemption should apply to the transfer of |
| On insolvency, the usual routes available for | | | | property from an existing partnership into an LLP if the |
| companies are followed, i.e. voluntary arrangement, | | | | transfer takes place within a year of incorporation. The |
| receivership, administration or winding up. Members can | | | | identity of the partners in the old partnership and the |
| be responsible for preferences or wrongful trading, or | | | | members in the LLP must be the same. Further, their |
| a new obligation to "repay withdrawals" taken within 2 | | | | proportionate beneficial interests in the property must |
| years of insolvency at a time when the LLP was | | | | be the same, or if there are any changes these must |
| unable to pay its debts (subject to court discretion). | | | | not have arisen for avoidance purposes. Any exempt |
| Relationships within the LLP | | | | transfer will still need to be denoted as not chargeable. |
| Every member is an agent of the LLP, but they are | | | | A transfer of property from an existing partnership to |
| not agents of each other. Members do not owe duties | | | | an LLP should be exempt from VAT provided it is a |
| of good faith to each other. | | | | "transfer of a going concern". |