What is a Limited Liability Partnership (LLP)?
A Limited Liability Partnership is a hybrid between a partnership and a limited
company.
Summary
Registration
LLP Names
Registered office
Limited Liability
Members
Procedures
Accounts and audit
Taxation
Limited Liability Partnership Agreements
Forms
Register your LLP
Summary
A new type of business structure became available as from April 6th. 2001 when
the Limited Liability Partnerships Act 2000 came into effect. The Limited Liability
Partnerships Regulations 2001 (SI 2001 No. 1090) supplement the provisions of
the Act.
A Limited Liability Partnership (LLP) is a separate legal entity conferring
full limited liability on its members. It is created by registration at Companies
House. There must be at least two members, but there is no upper limit. At least
two of the members must be named as 'designated members', who accept responsibility
for sending information to Companies House for registration, etc.
An LLP is subject to the same rules as a private limited company for the registration
of accounts at Companies House, and the auditing of its accounts. The same exemptions
from these requirements are available.
The Act does not impose a structure for the management of an LLP. There are
no statutory provisions for general meetings, directors, company secretary,
share allotments, etc. As with the existing partnership, these are matters for
the partnership agreement (if any) There is no statutory requirement to register
(or even to have) a written partnership agreement, but such an agreement is
essential in practice. Implied terms, which apply in the absence of agreement
to the contrary, are set out in the Limited Liability Partnerships Regulations
2001 (see below).
The LLP is treated for tax purposes as an ordinary partnership: i.e. each partner
is liable to income tax under Schedule D for his or her share of the profits,
and to Capital Gains Tax in respect of any gains made on the disposal of partnership
assets.
The Limited Liability Partnership in more detail
(Section numbers are those of the Limited Liability Partnership Act 2000, unless
otherwise stated.)
Registration
An LLP is registered at Companies House using form LLP2. The registration fee
is £20. Electronic registration is not possible. The registered details
include:
The name of the LLP
The country of situation of the registered office
The address of the registered office
The name and address of each member of the LLP
The identities of the designated members.
It is not necessary to register a copy of the partnership agreement or other
constitution. In practice a limited liability partnership agreement is essential.
See below.
Certificate of incorporation
Companies House issues a certificate of incorporation.
LLP Names
Part I of the Schedule to the Act has rules about names of LLPs. Essentially
the rules are the same as those that apply to limited company names.
The name must end with either the words 'limited liability partnership' or the
letters 'llp' or 'LLP', or Welsh equivalents. The remaining rules are equivalent
to the rules applying to registered companies.
The name must not be the same as one already on the CRO index. (For 'sameness'
see para. 8 of the Schedule. These are the same rules as apply to companies.)
The use of the name must not constitute a criminal offence, nor may it be offensive.
Approval is required for the registration of an LLP with a name which suggests
connection with the government or a local authority, or which includes words
or expressions specified in the Company and Business Names Regulations.
An LLP can change its name at any time. No procedure (such as the special resolution
required for companies) is laid down, but the change must be notified to Companies
House by one of the designated members and takes effect when Companies House
issues a certificate on change of name. As with companies, the same rules apply
to a change of name as to initial registration, and the change does not affect
any rights or liabilities of the LLP. Another similarity is that the Secretary
of State may order an LLP to change its name if it is the same or too like a
name already on the register, or misleading information was given to obtain
registration, or the name is misleading.
Registered office
The rules on registered offices are also the same. Every LLP must have a registered
office in its country of situation. The address can be changed by notification
to Companies House on the prescribed form (LLP287).
Limited Liability
An LLP is a body corporate with legal personality separate from that of its
members. It has unlimited capacity. The members of an LLP have limited liability,
but this is subject to s.15, which allows regulations to be made to apply any
law relating to companies to LLPs. The Limited Liability Partnerships Regulations
2001 extend provisions in the Companies Acts, the Company Directors Liability
Act and the Insolvency Acts to LLPs, so that the members of an LLP may lose
their limited liability in the same circumstances as apply to company directors.
For example, the members may be made liable for wrongful trading or fraudulent
trading. Note also, that s. 24 of the Companies Act applies. If the number of
members falls below two, the remaining member incurs unlimited liability after
six months.
Members
The partners in an LLP are called members. The minimum number is two, there
is no maximum number. The members may be individuals or companies.
Designated members
By s. 8, each LLP must have at least two 'designated members', who are responsible
for sending documents to Companies House for registration, etc. If Companies
House is not notified of the identities of the designated members, all the members
are designated members (s. 8(2)). The designated members may be changed from
time to time by notification on the prescribed form. The Act itself does not
specify the purpose of these designated members but the regulations that apply
the provisions of the Companies Acts to LLPs make the designated members the
persons who are responsible for compliance with the various registration requirements,
etc.
Changes in membership
The initial members are notified to Companies House on the forms sent on incorporation.
New members can be introduced by agreement with the existing members. A person
may cease to be a member in accordance with any agreement with the other members
or, subject to such agreement, can resign by giving reasonable notice. A member
cannot generally be an employee of the firm. All changes in membership, and
the identity of designated members, must be notified to Companies House on the
prescribed form (LLP288a for new members, LLP288b For cessation of membership
and LLP288c for changes in membership details).
Relationship of members to each other
S. 5 provides that the mutual rights and duties of members of an LLP and
those of the LLP itself are governed by agreement between the members, or between
the LLP and its members. Such agreement can be made before incorporation of
the LLP and made binding on it: s. 5(2)). In the absence of such agreement,
their relationship is governed by the default provisions in the LLP Regulations.
These are broadly the equivalent of the implied terms in s. 24 of the Partnership
Act 1980. The regulations provide:
Regulation 7
The mutual rights and duties of the members and the mutual rights and duties
of the LLP and the members shall be determined, subject to the provisions of
the general law and to any agreement express or implied between the members,
or between them and the LLP, by the following rules:
1. All the members are entitled to share equally in the capital and profits
of the LLP.
2. The LLP must indemnify every member in respect of payments made and personal
liabilities incurred by him -
(a) in the ordinary and proper conduct of the business of the LLP; or
(b) in or about anything necessarily done for the preservation of the business
or property of the LLP.
3. Every member may take part in the management of the LLP.
4. No member shall be entitled to remuneration for acting in the business or
management of the LLP.
5. No person may be introduced as a member or voluntarily assign an interest
in an LLP without the consent of all existing members.
6. Any difference arising as to ordinary matters connected with the business
of the LLP may be decided by a majority of the members, but no change may be
made in the nature of the business of the LLP without the consent of all members.
7. The books and records of the LLP are to be made available for inspection
at the registered office of the LLP (or at such other place as the members think
fit) and every member of the LLP may when he thinks fit have access to and inspect
and copy any of them.
8. Each member shall render true accounts and full information of all things
affecting LLP to any member or his legal representative.
9. If a member, without the consent of the LLP, carries on any business of
the same nature as and competing with the LLP, he must account for and pay over
to the LLP all profits made by him in that business.
10. Every member must account to the LLP for any benefit derived by him without
the consent of the LLP from any transaction concerning the LLP, or from any
use by him of the LLP property, name or business connection.
Regulation 8. Expulsion
No majority of the members can expel any member unless a power to do so has
been conferred by express agreement between the members.
Members as agents
S. 6 of the LLP Act follows closely the wording of s. 5 of the Partnership Act
1890 by providing that every member is an agent of the LLP. The LLP is not bound
by anything done by a member who had no authority to act if the person he is
dealing with either knows that fact, or does not know or believe him to be a
member.
S. 6 (3) covers the situation where a person ceases to be a member of an LLP.
A person dealing with the LLP can regard the ex-member as still being a member
unless he has had notice of the fact, or the cessation of membership has been
notified to Companies House.
Members' fiduciary duties
An LLP is a corporate body, and at common law its members owe fiduciary duties
to it, even though this is not expressly set out in the legislation. It is unclear
whether, without express statutory provision, the members of an LLP owe a duty
of good faith to each other. These should be included in the firm's limited
liability partnership agreement.
Minority protection
S. 459 of the Companies Act 1985 (the 'unfairly prejudicial' remedy) applies
to LLPs but with the fundamental difference that its operation may be excluded
by unanimous agreement between the members. S. 459 provides that the court can
make such order as it thinks fit to give relief to members of a company in a
case of 'unfairly prejudicial conduct'. The law in this area has been subject
to a long process of review and is expected to be reformed in due course.
Procedures
Notice that there are no provisions in the Act for the calling and holding of
meetings, as one of the main intentions of the legislation is to provide freedom
for members to arrange their internal affairs.
One of the advantages of the LLP for small businesses is the simplicity of the
legislation. In a limited company there is a complex legal regime, originally
designed for large companies, under which some decisions have to be made by
the directors, but others must be effected by the right type of resolution (ordinary,
special, etc.) by the general meeting. No such structure is imposed on the LLP.
On the other hand, the lack of such a structure, and the fact that there is
no equivalent of Table A to provide a standard set of rules, make it essential
that a limited liability partnership agreement is drawn up.
Accounts and audit
An LLP is subject to the same rules as a private limited company for the registration
of accounts at Companies House, and the auditing of its accounts. The same exemptions
from these requirements are available. The result is that a 'small' LLP (one
with a turnover not exceeding £2.8 million and a balance sheet total not
exceeding £1.4 million pounds) can submit 'modified accounts' comprising
only an abbreviated balance sheet. If the turnover does not exceed £1
million pounds, the audit exemption will apply.
Annual return
An LLP must submit an annual return (form LLP363) under much the same regime
as applies to companies. The registration fee is £35.
Taxation
The LLP is treated for tax purposes as an ordinary partnership: i.e. each partner
is liable to income tax under Schedule D for his or her share of the profits,
and to Capital Gains Tax in respect of any gains made on the disposal of partnership
assets. This is achieved by inserting new provisions into various taxing Acts,
including:
Income tax
New sections 118ZA - 118ZD of the Income and Corporation Taxes Act 1988.
The main effect of these is that a trade, profession or business carried on
by an LLP is treated as if carried on by the members of the LLP in partnership,
and the property of the LLP is to be treated as partnership property. The result
is that the members of the LLP are taxed under schedule D, and the LLP itself
is not liable to any tax, such as corporation tax. By s.13, they are also liable
to Class 4 National Insurance contributions on their share of the profits.
Capital Gains Tax
Similarly, a new s. 59A is inserted in the Taxation of Chargeable Gains Act
1992, to provide that, where an LLP carries on a trade or business, its assets
are to be treated for CGT purposes as being assets of the members. This means,
for example, that a gain made on a disposal of an asset by the LLP is treated
as accruing to its members (as in a partnership) so that they, rather than the
LLP, may be liable to CGT on the gain.
Section 59A(2), however, provides for the LLP itself to be liable 'as if it
were a company' (i.e. to corporation tax) in some circumstances.
Inheritance Tax
New s. 267A of the Inheritance Act 1984 also provides that the property, business,
etc of an LLP is to be treated as if the LLP were a partnership. The incorporation,
change of membership or dissolution of an LLP is to be treated as the formation,
alteration or dissolution of a partnership. Any transfer of value by or to an
LLP is treated as made by or to the members as partners.
Limited Liability Partnership Agreements
The LLP Act does not require a limited partnership agreement to be registered
at Companies House. This has the advantage that its terms are not made public.
On the other hand, there is a danger that this will tempt people to register
as LLPs without having a suitable agreement. As there is no equivalent document
to Table (which provides standard articles for a company limited by shares),
the firm and its members will have only the implied terms from the LLP regulations
(set out above) to govern the relationship between them and the LLP itself.
These will rarely be adequate and in some cases will be entirely unsuitable.
The LLP agreement can be as simple or as complex as required by the circumstances.
There are some very large professional practices which are expected to become
LLPs. They will have complex agreements, just as they presently tend to have
complex partnership agreements. Most LLP agreements will resemble in many respects
the well-established standard partnership agreement. When devising such an agreement,
however, it will be important to remember that an LLP is a separate legal entity
and that the members of it have limited liability.
At Incorporation Services Limited we have devised a standard form of limited
liability partnership agreement, which will be suitable for most straightforward
trading LLPs. Just as with our standard memorandum and articles of association
for a private limited company, it should be amended or added to as required
by the particular circumstances. Because it has been devised as an off-the-shelf
document, some of the features of the LLP agreement are really quite different
from those usually found in a standard partnership agreement. For example, there
is no statement of the partners' capital contributions to the firm, because
in many circumstances there will be none. The agreement provides for the firm
to be owned by the members in certain proportions. There is no expulsion provision.
Members who wish to leave are required to give three months' notice and their
share can then be bought out by the other members.
Conversion
To convert an existing partnership to an LLP it will be necessary to follow
a similar process as the conversion to a limited company. There will have to
be a transfer of assets from the partners to the LLP, but LLPA 2000, s.12 provides
that stamp duty is not chargeable on that transfer if the members of the LLP
are the same as the original partners, and they hold the assets in the same
proportions (or different proportions provided this is not to avoid liability
to tax or stamp duty).
There are no provisions in the Act for the conversion of an LLP to a limited
company or vice versa, which seems to be unfortunate. It will be possible to
effect registration of the LLP in the name of the existing company, by undertaking
a simultaneous name change for the company. There would then have to be a transfer
of assets from the company to the new LLP.
Forms
LLP2 Application for Incorporation of a Limited Liability Partnership
LLP2 cont Continuation sheet to Form LLP2
LLP3 Notice of Change of Name of a Limited Liability Partnership
LLP225 Change of accounting reference date of a Limited Liability Partnership
LLP244 Notice of claim to extension of period allowed for laying and delivering
accounts - oversea business or interests of a Limited Liability Partnership
LLP287 Change in situation or address of Registered Office of a Limited Liability
Partnership
LLP288a Appointment of a Member to a Limited Liability Partnership
LLP288b Terminating the Membership of a Member of a Limited Liability Partnership
LLP288c Change of Particulars of a Member of a Limited Liability Partnership
LLP395 Particulars of a mortgage or charge in respect of a Limited Liability
Partnership
LLP395cont Continuation sheet to Form LLP395
LLP410 Particulars of a charge created by a Limited Liability Partnership registered
in Scotland
LLP419a Limited Liability Partnership: Memorandum of satisfaction in full or
in part of a registered charge
LLP419b Limited Liability Partnership: Memorandum of fact that part of a property
charged (a) has been released from the charge; (b) no longer forms part of the
LLP's property
LLP466 Particulars of an instrument of alteration to a floating charge created
by a Limited Liability Partnership registered in Scotland
LLP652a Application for striking off a Limited Liability Partnership
Register your LLP
Incorporation Services Limited can register your LLP. Our charges for the registration
of an LLP with our standard LLP agreement are £130.00 plus £22.75
VAT, plus the £20.00 registration fee (£172.75 in total). For further
details email us or telephone
0191 261 5545.
Limited Liability Partnerships
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