Limited Liability Partnerships – the forgotten saviour?

LLPs were introduced, with something of a fanfare, in the year 2000. For too long, professionals and others who wanted the tax and general flexibility of a partnership, had been forced to run the gauntlet of unlimited personal liability. And then came the LLP.

So what is a LLP? It is a separate legal entity, distinct from its members (partners), capable of trading and contracting in its own name, giving floating charges to secure borrowings and (crucially) allowing its members limited liability to the outside world. Generally, then, members of a LLP will not need to contribute personally to the debts and liabilities of the LLP, unless (broadly) they have been guilty of some form of wrongdoing or their LLP Agreement requires them to contribute. This was (and remains) a significant advantage.

As a quid pro quo, however, all relevant Companies Act provisions are deemed to apply equally to a LLP – members’ names are published; an annual return and accounts too must be filed at Companies House and are open to public inspection. There is therefore a degree of publicity that was not present with the original concept of partnership. Some don’t like this, though it is a small price to pay for the benefit of limited liability. In addition (and importantly) the Members’ Agreement itself is not a document of public record. It remains a private agreement between the parties.

Make sure you do have a full Members’ Agreement. If you don’t, the statutory default provisions will apply and these are rarely appropriate. In your own agreement, set out how you are to share profits, contribute capital, admit new members, allow members to retire, borrow, give security, deal with death of a member and so on. Incorporating a new LLP is relatively straightforward so, even if you have limited resources, make sure you allow enough time and money to produce a comprehensive Members’ Agreement. Clients sometimes resist this and it may be that they hanker after the “ready-made,” low-cost option of the limited company, bought off the shelf with articles of association already in place.

Indeed, we are seeing more and more businesses who seem to have chosen the limited company structure purely “by default”. Beware such an approach and make sure you have fully considered the benefits of a LLP and whether they are right for your circumstances. Remember also to take appropriate tax advice. A LLP is effectively “tax-transparent,” with its members being taxed as individuals. This is wholly different from a limited company, so be sure that you have chosen the most appropriate vehicle for your business. In the right circumstances, the LLP still offers real benefits.

Contact: Robert Goddard