Limited Liability Partnerships Flashcards
What is the key advantage of an LLP compared to a traditional partnership?
A) No requirement to file financial accounts
B) Members have limited liability
C) Members pay corporation tax
D) LLPs have no filing requirements with Companies House
B) Members have limited liability
Explanation: Unlike traditional partnerships where partners have unlimited liability, members of an LLP benefit from limited liability, meaning their personal assets are protected unless they engage in wrongful or fraudulent trading.
Which legislation primarily governs LLPs?
A) Limited Liability Partnerships Act 2000
B) Companies Act 2006
C) Partnership Act 1890
D) Insolvency Act 1986
A) Limited Liability Partnerships Act 2000
Explanation: The Limited Liability Partnerships Act 2000 (LLPA) created LLPs and provides the framework for their formation and operation. Other laws, such as the Companies Act 2006 and Insolvency Act 1986, apply in modified form.
How many members are required to form an LLP?
A) One
B) Four
C) Three
D) Two
D) Two
Explanation: Section 2(1) LLPA states that an LLP must have at least two members. If an LLP falls below this number for more than six months, the remaining member could become personally liable for the LLP’s debts.
Which of the following is not a requirement for registering an LLP?
A) Registered office address
B) At least two designated members
C) Memorandum and Articles of Association
D) A lawful business with a view to profit
C) Memorandum and Articles of Association
Explanation: Unlike companies, LLPs do not have a Memorandum or Articles of Association. Instead, they usually have an LLP Agreement, though it is not legally required.
What is the default rule for decision-making in an LLP if no agreement exists?
A) Decisions must be made unanimously
B) All members must agree in writing
C) Only designated members can make decisions
D) Decisions are made by a majority of members
D) Decisions are made by a majority of members
Explanation: Regulation 7(6) of the Limited Liability Partnerships Regulations 2001 states that, unless otherwise agreed, majority vote decides matters. However, changes to the nature of the business require unanimous consent.
Sarah and James set up an LLP. They did not sign an LLP Agreement. James believes he should receive a higher share of profits because he contributed more capital. Sarah insists on an equal split. What does the law say?
A) James is correct because he contributed more capital
B) Sarah is correct because profits must be shared equally unless agreed otherwise
C) James and Sarah must apply to court to settle the matter
D) Sarah must compensate James for his higher contribution
B) Sarah is correct because profits must be shared equally unless agreed otherwise
Explanation: Under Regulation 7(1), in the absence of an LLP Agreement, profits and capital are shared equally regardless of how much each member contributed.
Daniel, a member of an LLP, retires but does not notify creditors. Six months later, the LLP fails to pay a supplier, who sues Daniel. Can Daniel be liable?
A) No, because he left the LLP
B) Yes, because he failed to give actual or constructive notice
C) No, because LLP members are never personally liable
D) Yes, because he was a founding member
B) Yes, because he failed to give actual or constructive notice
Explanation: Under Section 36 PA 1890, which applies to LLPs, if a former member does not notify creditors of their departure, they may be liable for future debts.
ABC LLP is struggling financially. The members withdraw large sums of money six months before insolvency. What legal rule may apply?
A) Clawback provision under Insolvency Act 1986
B) Fraudulent trading under Companies Act 2006
C) Capital maintenance rule
D) No liability as LLP members have limited liability
A) Clawback provision under Insolvency Act 1986
Explanation: Section 214A Insolvency Act 1986 allows clawback of payments made to members within two years before insolvency if the LLP was already insolvent or became insolvent due to those withdrawals.
XYZ LLP wishes to remove one of its members, Brian. There is no LLP Agreement. Can they expel him?
A) Yes, as long as the majority of members agree
B) No, because there is no automatic power to expel a member
C) Yes, but only if Brian has engaged in misconduct
D) No, because all LLP members have equal rights
B) No, because there is no automatic power to expel a member
Explanation: Under Regulation 8, there is no implied power of expulsion. If an LLP Agreement does not contain expulsion provisions, members must agree unanimously or dissolve the LLP.
Emma and Jake are members of an LLP. Without consulting Jake, Emma enters a large contract on behalf of the LLP. Jake argues the contract is invalid because he did not approve it. Is he correct?
A) Yes, because both members must approve major contracts
B) No, because any member can bind the LLP in the usual course of business
C) Yes, because Emma exceeded her authority
D) No, because only designated members can enter contracts
B) No, because any member can bind the LLP in the usual course of business
Explanation: Under Section 6 LLPA, any member has authority to bind the LLP in the usual course of business unless the third party knew otherwise.
Grace and Harry are members of GH LLP. They never signed an LLP Agreement. Grace decides to borrow £50,000 from a bank on behalf of the LLP without telling Harry. The bank was unaware of any restrictions on Grace’s authority. Can the LLP be bound by the loan?
A) No, because all members must agree to major financial decisions
B) Yes, because any member can bind the LLP in the usual course of business
C) No, because Grace acted beyond her authority
D) Yes, but only if Harry later ratifies the agreement
B) Yes, because any member can bind the LLP in the usual course of business
Explanation: Under Section 6 LLPA, a member can bind the LLP if they act in the usual course of business, unless the third party knew of a restriction. Here, the bank had no knowledge of any restrictions on Grace’s authority, so the LLP is bound.
James is a designated member of an LLP but fails to file annual accounts at Companies House. What are the potential consequences?
A) The LLP is automatically dissolved
B) James can be personally fined
C) James has no liability as LLPs have limited liability
D) The LLP must apply to court for an extension
B) James can be personally fined
Explanation: Designated members have additional responsibilities, including filing accounts. If they fail to do so, they can face personal fines and possible prosecution under the Companies Act 2006, as applied to LLPs.
Emily is a member of a property development LLP. She personally guarantees a £100,000 bank loan for the LLP. The LLP later defaults on the loan. What happens next?
A) Emily is personally liable for the full £100,000
B) Emily is only liable for the amount of capital she contributed
C) The LLP is responsible, and Emily’s personal assets are protected
D) The bank cannot enforce the loan against Emily
A) Emily is personally liable for the full £100,000
Explanation: Although LLP members usually have limited liability, a personal guarantee overrides this protection. If Emily personally guaranteed the loan, the bank can pursue her personal assets.
John and Sarah operate an LLP without an LLP Agreement. John wants to bring in his brother as a new member, but Sarah disagrees. What is the legal position?
A) John can admit his brother without Sarah’s consent
B) The LLP must hold a vote, and a majority can decide
C) The unanimous consent of existing members is required
D) The LLP Agreement must be amended first
C) The unanimous consent of existing members is required
Explanation: Under Regulation 7(5), no new member can be admitted without the unanimous consent of all existing members, unless the LLP Agreement states otherwise.
Tom is a former member of an LLP. He left two months ago but his name is still on the LLP’s website. A supplier enters a contract thinking Tom is still a member. Is Tom liable for any debts under that contract?
A) Yes, because the LLP held him out as a member
B) No, because he is no longer involved in the LLP
C) No, unless Tom personally authorised the contract
D) Yes, but only if he was a designated member
A) Yes, because the LLP held him out as a member
Explanation: Under Section 14 PA 1890 (holding out rule), if a former member is still represented as a partner, they may be liable for debts incurred by the LLP unless proper notice of departure was given.
XYZ LLP has three members but two decide to leave, leaving only Adam. What happens next?
A) The LLP is automatically dissolved
B) The LLP continues, but Adam may become personally liable after six months
C) Adam can continue the LLP as a sole trader
D) Adam must re-register as a company
B) The LLP continues, but Adam may become personally liable after six months
Explanation: An LLP must have at least two members. If it falls to one, it can continue for six months, but after that, the sole member could become personally liable for the LLP’s debts.
An LLP has no LLP Agreement. A dispute arises over whether a member should be paid a salary for managing the LLP. What is the legal position?
A) The member is entitled to reasonable remuneration
B) The member is not entitled to any salary
C) The LLP must agree by majority
D) The LLP must follow employment law rules
B) The member is not entitled to any salary
Explanation: Regulation 7(4) states that no member is entitled to remuneration unless there is an agreement to the contrary.
Mary and Sam are members of an LLP. Mary wants to expel Sam due to poor performance. There is no LLP Agreement. Can Mary remove Sam?
A) Yes, if Mary is a designated member
B) No, because there is no implied power of expulsion
C) Yes, if she gets majority approval
D) No, unless Sam agrees
B) No, because there is no implied power of expulsion
Explanation: Regulation 8 states that there is no automatic right to expel a member unless an LLP Agreement explicitly allows it.
Liam and David are members of an LLP. The LLP becomes insolvent. It is discovered that Liam withdrew large sums of money from the LLP a year before insolvency. What legal rule may apply?
A) Fraudulent trading
B) Clawback provisions under the Insolvency Act 1986
C) Unfair prejudice
D) Derivative action
B) Clawback provisions under the Insolvency Act 1986
Explanation: Section 214A Insolvency Act 1986 allows the recovery of withdrawals made by members up to two years before insolvency if the LLP was already in financial difficulty.
An LLP fails to register a charge over its assets at Companies House. What is the consequence?
A) The charge is still valid but unenforceable against third parties
B) The charge is void
C) The LLP must pay a fine but the charge remains valid
D) The charge becomes a floating charge
B) The charge is void
Explanation: Under Companies Act 2006, as applied to LLPs, a charge must be registered at Companies House. If not, it is void and cannot be enforced against creditors.
