What is a Limited Liability Partnership?
A Limited Liability Partnership ("LLP") is a corporate business structure widely used across the UK, particularly by professional service firms and growth-stage businesses. Although an LLP shares some characteristics with a traditional partnership, an LLP is a separate legal entity. This means it can own property, enter contracts in its own name, and is responsible for its own liabilities, providing financial protection for its members.
The Limited Liability Partnership Act 2000 ("LLPA 2000") refers to the owners of the LLP as “members” but they are often referred to as “partners” in practice. LLP members may be individuals or corporate bodies.
Unlike general partnerships, LLP members enjoy limited liability, normally capped at the amount they have agreed to contribute to the LLP. This protection, combined with tax transparency and relatively light administrative requirements compared to companies, makes LLPs an attractive medium for many businesses.
LLPs in the UK are governed by the LLPA 2000 and the LLP Regulations 2001 ("LLPR 2001"). These set out the statutory framework for an LLPs formation, operation and governance in the absence of an express LLP agreement.
Starting and operating as an LLP
An LLP must be formally incorporated at Companies House, the UK registrar for companies and LLPs. Unlike a general partnership, an LLP only exists once incorporation documents have been filed, a fee has been paid, and the registrar has issued a certificate of incorporation.
This incorporation step is crucial, as members of a general partnership may inadvertently expose themselves to unlimited personal liability, whereas LLP members do not.
Why do we need an LLP agreement?
The members of an LLP are not legally obliged to enter into any formal LLP agreement regulating the relationship between them. In the absence of one, however, the default provisions of the LLPR 2001 apply. These default provisions rarely reflect how modern businesses actually wish to operate, making a tailored written LLP agreement advisable.
A well drafted LLP agreement will:
- clearly set out members’ rights, responsibilities and obligations;
- prevent potential disputes by reducing ambiguity;
- override the often unsuitable default statutory rules; and
- protect both the LLP and its members throughout the life of the business.
What should your LLP agreement include?
1. Capital contributions and profit sharing
The LLP agreement should clearly set out:
- the amount of capital each member is required to contribute on joining the LLP;
- whether members can be required to contribute additional capital in the future; and
- how profits of the LLP are to be shared between members.
By default under the LLPR 2001, members share profits equally, regardless of capital contribution or work input. An LLP agreement commonly varies this position so that profit shares reflect factors such as a member’s seniority, financial investment, or their time spent working for the LLP.
2. Management structure and decision-making
An LLP agreement should define how the LLP is managed and how decisions are made. While all LLP members are agents of the LLP, the law does not require all of them to participate in management. The LLP agreement may therefore provide for:
- whether all members are involved in the day-to-day management of the LLP, or whether management is delegated to certain members or committees;
- which decisions can be made by majority and which require unanimous consent; and
- any limits on individual members’ authority to bind the LLP.
Although the default rules allow every member to participate in management, most LLPs prefer a clearer and more structured management framework to reduce uncertainty and the risk of disputes arising.
3. Roles, duties and responsibilities of members
The LLP agreement may set the roles and responsibilities of each member, such as:
- their expected work commitments;
- any specialist roles or areas of responsibilities; and
- standards of conduct and performance.
Clear role definitions help ensure accountability and may support disciplinary action or expulsion where a member breaches the agreement.
4. Designated members
An LLP must have at least two designated members who have particular responsibilities and functions within the LLP, such as responsibility for statutory filings and compliance obligations.
If the members do not select particular individuals to be designated members, all members are deemed to be designated members and there is no distinction between them under the LLPA 2000.
The LLP agreement should therefore specify:
- who the designated members are;
- how designated members are appointed or removed; and
- whether all members are to act as designated members.
5. Joining and leaving the LLP
A well-drafted LLP agreement should regulate changes in membership, including:
- the procedure for admitting new members;
- whether existing members must approve new admissions, and by what majority;
- the notice required for a member to retire; and
- whether members can be expelled, and, if so, on what grounds.
Without an express expulsion clause, members cannot be forced to leave under the default rules, making this an important provision.
6. Valuation and payment of a departing member’s interest
When a member leaves the LLP, the agreement should explain:
- how the departing member’s interest will be valued;
- whether goodwill is included in the valuation; and
- when and how payments will be made to the departing member (for example, as a lump sum or in instalments).
Such provisions are crucial to maintaining business continuity and avoiding disputes that could threaten the LLP’s financial stability.
7. Restrictions and restraint on trade
LLP agreements often include restrictive covenants to protect the LLP’s business after a member leaves such as non-compete, non-solicitation of clients or employees and confidentiality obligations.
Such restrictions should be reasonable in scope, duration and geographical area to be enforceable.
8. Dispute resolution
To avoid costly litigation, an LLP agreement commonly includes dispute resolution clauses requiring members to attempt mediation or arbitration before going to court.
This can provide a faster and more cost-effective way of resolving internal disputes.
How To Get In Contact
If you require advice regarding forming an LLP or drafting or reviewing an LLP agreement, please speak with our corporate lawyers on +44 204 600 9907 or email info@culbertellis.com. We can help ensure your agreement reflects your business needs, protects your members, and avoids the risks associated with the statutory default rules.
