Limited Liability Partnership

Question 1

Limited Liability Partnership

Answer 1

This is described as a hybrid of a traditional partnership and a limited company.

This type of business was created to protect people such as accountants and solicitors from ordinary partnerships (they have unlimited liability).

Members can limit their liability.

This is an incorporated business

Question 2

Limited Partnership

Answer 2

• registered under the Limited Partnership Act 1907
• extremely rare

-at least one general partner (in charge of day to day running of the business)
control of the management of the business
unlimited liability

limited liability partners (eg investors)

• not entitled to participate in management of business
• cannot bind the partnership
• liability is limited to the amount of capital they invested in the business

Question 3

Limited Liability Partnership (LLP)

Answer 3

-registered under the Limited Liability Act 2000 (effective from 6 April 2001)

Question 4

LLP Information

Answer 4

New type of business (combines the advantages of incorporation with the flexibility of a partnership)

Has features of an ordinary partnership and limited companies

LLP is a corporation and has separate legal personality from the members

Not ideal for those who don’t want to separate the ownership from control

Question 5

LLP

Separate legal personality

Answer 5

Separate legal personality from its members means that the business can

• hold property
• contract in its own name
• sue and be sued in its own name
• become a member / shareholder / partner in other business
• grant floating charges

-have perpetual succession (this is important because if there is a change in the membership it wont affect the partnership unlike ordinary partnerships where the business is dissolved

Question 6

LLP features

Answer 6

members liability is limited

subject to regulations (unlike general partnerships where there is little regulations)

the LLP has unlimited capacity (cannot act ultra vires!) (cannot act without power or capacity)

not-profit making organisations cannot be LLPs (the main purpose must be to make profit)

Question 7

LLP

Formation

Answer 7

The LLP must have at least two members who signed the incorporation document (members should aim to achieve profit)

If the business only has one member after 6 months then that member will lose limited liability and be completely responsible for any debts and liabilities.

The founding members of the LLP must register the incorporation document & other necessary documentation with the Registrar of Companies

They must pay the registration fee
↓
certificate of incorporation
(issued by the Registrar)

Question 8

LLP

Formation

What must the incorporation document state?

Answer 8

• the name of the LLP warning suffix (must end with “Limited Liability Partnership” or “LLP”)
• the location of its registered office
• the address of its registered office
• the names and addresses of all the members of LLP
• the names of the two designated members (they are responsible for signing notices & accounts and delivering them to the registrar)

Question 9

LLP

Members

Answer 9

In a partnership we talk about partners where as in an LLP they are referred to as members.

-no maximum limit on the number of members
members

• Designated members
• General members

-every member may take part in the management of the LLP (subject to partnership agreement)

Question 10

LLP

Designated Members

Answer 10

At least two members must be “designated members”

• names must be given to the Registrar
• administrative & filing duties

Duties are similar to officers, directors, and secretaries of a limited company. For example they ensure that the LLP comply with the statutory requirements, duty to inform the registrar of any changes in membership, responsible for annual return and accounts.

There are also at risk of the directors disqualifications act.

Question 11

LLP

Changes in Membership (must always inform the registrar)

Answer 11

• new members are admitted by agreement of the existing members
• a person ceases to be a member by giving reasonable notice to the other members or by following other agreed procedure
• changes in membership do NOT affect the existence of the LLP
• BUT → the Registrar must be notified within 14 days

Question 12

LLP

Regulation

Answer 12

-not required to have a formal partnership agreement → no requirement to file one to the Registrar of companies

-in the absence of any expressed agreement provisions of
Limited Liability Partnership Act 2000 (very sort acts only contains 19 sections) &
Limited Liability Partnership Regulation 2001
Limited Liability Partnership (Scotland) Regulation (2001) will apply

Members of LLP don’t need to share any losses of the company.

Question 13

LLP

Regulation

Possible content of a partnership agreement

Answer 13

• the authority of the members to bind the LLP
• each member’s financial contribution to the LLP
• shares of profits & losses
• the circumstances in which the LLP agreement will come to an end
• the appointment of new members
• special classes of members with different rights and duties
• the expulsion of existing members
• how disputes between the members are to be resolved
• whether changes to the member’s agreement are to be made unanimously or by majority

Question 14

LLP

Administrative duties/disclosure

Answer 14

Notify the Registrar of any changes to

• membership,
• designated members (act as officers of the company) or
• registered office

Provide the name of the LLP

• on correspondence and
• outside its place of business

Deliver an annual return to the Registrar

Question 15

Authority of LLP members

Answer 15

Members are agents of the LLP

Acts within authority → binds the LLP by his act (to third parties)

LLP will not be bound where
-member does not have authority AND
the third party
-is aware that he does not have authority or
-does not know or believe him to be a member of the LLP

Question 16

Authority of LLP members

Member ceases to be an LLP member

Answer 16

If an individual ceases to be an LLP member this fact must be communicated to

-third parties dealing with the business (→ if not former
member will continue to be regarded as being involved in the business)
-the Registrar of Companies

Question 17

LLP

Liability

Answer 17

Need to differentiate the liability between the LLP and the members.

LLP - Unlimited Liability (for debts and obligations)

Members- Limited Liability (unless negligent)

If a member is in breach of the duty of care then they will be personally liable.

Question 18

LLP

Liability Creditor protection

Answer 18

There are no controls over capital withdrawals therefore creditors have to rely on the:

• Filing of accounts (gives creditors an idea of financial position)
• Insolvency Act 1986

Question 19

LLP

Liability Creditor protection

Insolvency Act 1986

Answer 19

When LLP becomes insolvent, members of the LLP may propose a voluntary agreement to

• put the business into administration or
• go into voluntary or compulsory liquidation

Power to disqualify members

Question 20

LLP

Liability Creditor protection

Insolvency Act 1986 Law relating to companies insolvency also applies to LLP

Answer 20

With two modifications:

Withdrawals made by members within two years prior to winding-up may be clawed back if it can be shown that the member (at the time of the withdrawal) knew or had reasonable grounds to believe that the LLP was or would become insolvent

Past and present members may be required to contribute to the assets of the LLP to the extent that they have agreed to do so in any LLP agreement

Question 21

Terminations of an LLP

Answer 21

Unlike an ordinary partnership it is not dissolved by one of its members leaving

Can be dissolved / terminated by → agreement of the members unanimously (or in accordance with any agreement)

Members who leave have no automatic rights to shares of the LLP as there is a separate legal personalty so the assets will belong to the LLP

Question 22

LLP Accounts & Taxation

Answer 22

• required to produce & publish financial accounts (file with the registrar of companies)
• accounts & annual return must be submitted to the Registrar of Companies
• members are taxed as individuals on partnership profits (just as in ordinary partnerships)