LLP Formation

A limited liability partnership (LLP) is a legal structure for conducting business. Professional firms such as solicitors and accountants frequently establish themselves as limited liability partnerships, but the concept can also be advantageous for other sorts of businesses.

Limited liability partnerships are governed by different pieces of legislation, including the Limited Liability Partnership Regulations, 2001, which distinguish them from “conventional” commercial partnerships and the limited company structure.

A limited liability partnership is a separate legal entity from its members (partners), who are only liable for the amount of capital they deposit in addition to any personal guarantees. The partnership is registered at Companies House and can only be utilised by for-profit enterprises. In this article, LLP Formation, we take a look at the process involved and the options available to you.

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How do LLPs work?

All liabilities in a typical partnership are borne by the partners, not the partnership, because the partnership lacks a separate legal identity. However, an LLP is its own legal entity and is therefore susceptible to its own responsibilities. This means that the members of a limited liability partnership (LLP) are not liable for the debts of the entire LLP.

In a typical partnership, each partner is individually accountable for the partnership’s debts, whereas in a limited liability partnership, each member’s liability is limited to the extent of his contribution to the LLP’s assets.

Thus, the member’s obligation closely resembles that of a limited company shareholder. It is the liability of the individual members that is limited, not that of the LLP itself.

An LLP is required to file similar information with the Companies Register as a corporation, including yearly accounts. This means that the finances of a limited liability partnership (LLP) are accessible to public scrutiny, unlike those of a standard partnership, which are confidential. Members of an LLP don’t have to be individuals but might be businesses.

Are there advantages to operating as an LLP?

The benefits of an LLP over a conventional partnership are readily apparent: members of an LLP have restricted liability, whereas members of a typical partnership have limitless liability. The distinction between a limited liability partnership and a limited company is less apparent. Certain organisations, such as law firms, dentists, accountants and other professional services often prefer to operate as a partnership; therefore, if the partners want to limit their liability, they must incorporate LLPs. Other businesses that operate as LLPs, however, can reap benefits. The most significant is that an LLP retains the flexibility of a traditional partnership with regard to its members, who can join and leave freely and in certain circumstances can be removed from the LLP by the other members, as opposed to the shareholders of a corporation, who own a specific asset (their share) and can only leave if they sell the share (and it is generally difficult to remove a shareholder against their will).

How does an LLP function?

The law specifies the regulations governing the operation of an LLP, although many of the default positions can be altered by written agreement between the members. Many of the default rules are likely to be undesirable; for instance, they permit profit to be divided equally among members under all situations and prohibit ejection of a member. Therefore, a limited liability partnership will often require a limited liability partnership agreement to govern its operations. This contract will address the following:

• Departure of members and recruitment of new ones
• Contribution to earnings and capital
• Restriction on previous members

How is an LLP formed?

The formation of an LLP is comparable to the formation of a limited liability company. The primary steps include:

1. Name your limited liability partnership.

Checking the public register of corporations to determine which names are already in use is the first step. The name cannot be too close to that of an existing LLP or corporation. It cannot contain any words that could be regarded offensive or discriminatory, or that are on the list of sensitive words prohibited by Companies House.

In addition, the complete official name of an LLP must conclude with “Limited Liability Partnership” or “LLP” – or their Welsh equivalents.

2. Register your business with Companies House

After selecting a name, the next step is to register your LLP with Companies House.

A registered LLP address is required as part of the registration process. This cannot be a PO Box; it must be a complete street address in the same nation as the LLP is being created. A home address may be provided, but it will be visible to the public.

3. Designate members

An LLP must always have at least two partners, also known as designated members.

All partners can be automatically classified as designated members, or specific partners might be identified as designated members.

Designated members of an LLP are responsible for the following:

• keeping accounting ledgers
• filing annual accounts and confirmation statements to Companies House,
• updating the register of companies with any necessary changes to the LLP
• acting for the LLP if it is wound up or dissolved.

Why is it necessary to establish an LLP agreement?

There is no statutory counterpart to the articles of organisation necessary for private limited corporations in the case of LLPs. A limited liability partnership agreement is not required by law, and an LLP can be formed without one. However, it is a fairly common and generally sound proposal that a new limited liability partnership (LLP) enter into a partnership agreement. A well-drafted LLP agreement can accomplish the following:

• Provide clarity and assurance regarding members’ expectations.
• Contribute to the avoidance of avoidable misunderstandings or conflicts.
• Provide a framework of norms for resolving such conflicts that do occur.

Without an LLP agreement, or when an LLP agreement is silent or poorly designed, an LLP is regulated by the “default provisions” of the Limited Liability Partnerships Act 2000 and the Limited Liability Partnerships Regulations 2001, which establish certain rights and obligations for LLP members. Among these default provisions are the following:

• That all members are entitled to an equal share of capital and profit, even if their contributions to the firm are varied.
• That all members have equal voting rights and participate equally in the management of the LLP’s business.
• This unanimous permission is required for new members to be introduced.
• That no member may be expelled without his or her consent, for whatever reason.
• That the LLP shall indemnify members for expenses incurred in connection with the LLP.

By relying on these default conditions, it is consequently difficult to eject members, manage how earnings are split, assign different levels of responsibility to members, or even force a member to report to work. The majority of LLPs will consequently seek to establish a limited partnership agreement that will supersede those parts of the statutory provisions that are incompatible with their LLP.

Additionally, the Limited Liability Partnerships Act’s provisions do not address a number of common scenarios or areas where members might anticipate protection. Having a documented LLP agreement in place enables members to reach additional agreements.

When is it appropriate to enter into an LLP agreement?

It is generally preferable to enter into an LLP agreement at the time the partnership is registered with Companies House. At that point, the members are most likely to agree on what they anticipate from the company.

What should be included in an LLP agreement?

The precise contents of a limited liability partnership agreement will depend on the LLP’s circumstances and needs, as well as those of its members, who have considerable discretion in agreeing to any provisions they deem necessary and appropriate. One agreement may be very different from another in terms of scope, content, and complexity. For these reasons, it is prudent to seek the assistance of a solicitor or accountant prior to drafting an agreement to ensure that it is tailored to the LLP members’ interests.

However, the following are frequently included conditions in a limited liability agreement:

The fundamentals of the LLP

• The company’s name
• The physical location of the registered business
• The LLP’s business model

Information about members

• The agreement’s signatories’ names.
• Who will be designated as members.
• There is no upper limit on the total number of members.
• The procedure for appointing new members in detail.
• Provisions for what occurs in the event of a member’s death, retirement, or other voluntary departure
• Any laws relating to member expulsion, including the circumstances under which they may be invoked
• Working arrangements, including any expectations for which members should perform which activities and how much time each member should devote to the LLP’s business.

Financial Arrangements

• How much capital the members must contribute to the LLP.
• Any other provisions relating to the financing of the limited liability partnership.
• How the LLP’s income and losses should be distributed among its members.
• Whether any of the partners will receive a salary or will be able to extract recompense from the business.
• Policies governing accounting, banking, and other financial transactions.
• What types of assets may the LLP own and how will they be managed.

Managing the Limited Liability Partnership

• Procedures for managing the LLP on a day-to-day basis.
• The rules governing decision-making, such as who has the authority to make choices and whether decisions require consensus among some, a majority, or all members.
• Whether, when, and how member meetings will be held, as well as how those meetings will be run.
• Any limitations on the authority of an individual member to bind the LLP.

Disagreements between members and dissolution of a limited liability partnership

• Procedures for resolving conflicts amongst LLP members.
• Conditions of non-competition if a member leaves the LLP, which may include refraining from dealing with the LLP’s customers or employees, as well as information secrecy.
• Conditions under which a limited liability partnership may be wound up and the procedure to be followed.

How we can help

We have a proven track record of helping clients deal with the process involved in creating an LLP. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/

How to Contact Our Corporate Solicitors

It is important for you to be well informed about the issues and possible implications of creating a Limited Liability Partnership. However, expert legal support is crucial in terms of ensuring your partnership is set up correctly.

To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Corporate, News Tagged as

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