The Importance Of An LLP Agreement

A limited liability partnership or “LLP” is a hybrid form of corporate structure which has aspects of a limited company and a general partnership. Their hybrid structure means that they benefit from having their own separate legal personality (like a company) which means they can own property and enter into contracts in their own name. However, there is no distinction between their management and ownership which is more akin to that of a traditional partnership. Unlike a general partnership, the members of an LLP have limited liability for its debts or other obligations of the LLP.

Why do I need an LLP Agreement?

LLP legislation is quite short as it was intended that parties would agree between themselves how their LLP should be managed depending on its business. This means that whilst an LLP can function without an agreement, many of the matters an LLP member should consider are not covered by the statutory regulations.

Some key areas to consider in an LPP agreement include: –

Capital, Profits and Payments

LLPs do not have any “shares” capable of being transferred like in a company, but members do have a “share” in the LLP, its capital and profits. Without an LLP agreement members will be entitled to an equal share in the capital and profits of the LLP (even if this was not contributed equally). Through an LLP agreement, these obligations and benefits can be specifically tailored to the purpose of the LLP. For example, members could be obliged to contribute different amounts of capital and there might be a different split of profits dependant on roles and involvement in the day to day business.

New Members

It is important to consider how new members will join the LLP. It may be necessary for all members to agree to a new member joining or it may be more appropriate to allow for a majority, such as 75%, to admit new members. Under the default provisions, all existing members must consent to the introduction of a new member. This can be important for business succession planning.

Retirement/Expulsion of Members

As a member with a financial interest in the LLP, you will want to ensure that the business can continue to operate efficiently and have the ability to remove disruptive or underperforming individuals if necessary. Without effective rules around when a member should be expelled from the LLP (for example where they have become bankrupt or breach the LLP agreement), and possibly when someone should retire, the LLP can be left hamstrung.

Management of the LLP

Each member will usually have some form of ability to vote on key decisions, however LLP legislation stipulates that there must at all times be at least two “designated members”. Designated members have some additional administrate obligations (such as signing off accounts and ensuring the LLP’s Companies House filings are up to date). As such, these “designated” roles should be reserved for specific members, to avoid confusion over who is responsible for these tasks. If an LLP has no agreement and does not stipulate who its designated members are, it will fall to the default position, which is that all members will be designated members.

The LLP Legislation does not provide for any frequency of meetings or for certain members to have a management role. If you want to have a management structure an LLP agreement could provide that the designated members form a management board to oversee the business of the LLP.

Employment-like Rights

The members of an LLP are not employees and under the default rules there are no provisions relating to employment-like rights such as annual leave, sickness, maternity or paternity leave.  Without these sorts of rules there is nothing to dictate how much leave a member can take or a clear way of avoiding all members being absent from the business at the same time.

Summary

Without an LLP agreement the members have to fall back to the default position. This is often inappropriate as there are no clear rules as to the management of the LLP, there is an assumption that all members are equal in all respects (monetarily and in terms of decision making) and there are important parts of running a business which are simply not covered.

A properly drafted LLP agreement will set out the way in which the LLP is to be run and will properly reflect what the members intend for themselves, the LLP and its business.  If you have questions relating to your LLP, an LLP agreement or incorporating an LLP, please contact a member of the Corporate and Commercial team at BHW Solicitors.