Mark Watson of Ashton KCJ on Limited Liability Partnerships and the dangers of default provisions

A LIMITED Liability Partnership (LLP), incorporated under the Limited Liability Partnerships Act 2000, is an alternative corporate vehicle that combines the flexible structure of a partnership with the benefits of limited liability.

An LLP has its own legal personality which enables it to own assets in its own name and be liable for its own debts. For tax purposes, however, an LLP is treated as a partnership, with each of its members being liable for tax on their share of the LLP’s income.

There is no specific requirement for an LLP to have an LLP agreement. In the absence of such an agreement, the governance of the LLP, including the rights and duties of its members, would be left to the default provisions set out in the Limited Liability Partnerships Regulations 2001.

It is unlikely that the default provisions would be adequate for the governance of most LLPs. For instance:

• All members are entitled to share equally in the capital and profits of the LLP (Regulation 7(1)). This may not be appropriate in all circumstances. For example, where one member has put in more capital than another, they may wish to receive a greater share of the profits.

• A member cannot be expelled from the LLP unless a power to do so has been conferred on the members by express agreement between the members (Regulation 8). Whilst expulsion may not seem to be an issue at the start of the business relationship, it may be relevant in the future. It is best, therefore, to agree the circumstances under which a member can be expelled at the outset.

• The Regulations contain no provisions that cover a scenario whereby one of the members wishes to leave the LLP. In the absence of an agreement between the members, the Act allows a person to cease being a member by giving reasonable notice to the other members. Further, in the absence of an express agreement, a person who gives reasonable notice to cease to be a member could suffer significant financial loss as there are no default provisions for the financial or other rights of the leaving member. There is no right for the leaving member to be paid the amount of any capital which has been credited to their capital account or the balance of any undrawn profits.

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To ensure that the default provisions do not cause problems, an LLP agreement is advisable.