An LLP is a form of separate legal business entity that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. They are intended for businesses which carry on a trade or profession, and are particularly attractive to larger professional partnerships.
LLPs are in law regarded as 'bodies corporate' and are subject to aspects of company law, but for tax they will generally be treated as 'partnerships'. The members provide working capital and share any profits. Members who are individuals will be liable to pay income tax under self assessment, and self-employed Class 2 (ceasing in April 2018) and Class 4 National Insurance contributions. Members who are companies will be liable to pay corporation tax on their share of profits.
The members of an LLP have limited liability, but the LLP is liable for all its debts to the full extent of its assets. To the extent that the members have contributed to those assets, a member risks losing that amount should the creditors claim those assets.
An LLP has unlimited capacity which means that third parties need not be concerned about any restrictions or activities.
An LLP has complete flexibility as to the internal structure which it wishes to adopt; there are no requirements for board or general meetings or decision-making by resolution. Unlike a company, but similar to a partnership an LLP does not have a memorandum or articles of association.
LLP disclosure requirements are very similar to those of a company, including the filing of annual accounts (audited where necessary). There are also similar rules for the filing of annual returns, and notifying changes in members' details or the location of the Registered Office. However, the LLP agreement remains confidential.
Every LLP must have at least two, formally appointed, Designated Members, who carry responsibilities similar to those of a Company Secretary. These designated members have statutory responsibility for certain tasks and are personally liable in the event of a default to any fine or penalty. Responsibilities include:
- Signing accounts
- Delivering accounts to the registrar of companies
- Appointments and removal of auditors (if required)
- Notification of membership changes (and changes to the registered office) to the registrar of companies
- Preparing, signing and delivering the annual return
- Applying for the LLP to be struck off the register
The name of an LLP is used in a similar way to that of a company, and is displayed in the format Millionaire Limited Liability Partnership, or Millionaire LLP, and there are similar restrictions on the use of similar or sensitive names
A comprehensive agreement governing the duties and responsibilities of the members is a necessity, therefore, and it will need to include provisions for:
- The management of the LLP
- The decision-making process
- The capital contributions required of the members, both while a going concern and (if any) on liquidation
- The division of profits
- Changes to the membership
- Dispute resolution
- Termination of the LLP
- Provision for the amendment of the LLP agreement
Advantages of an LLP include:
- Limited liability: reduced risk to personal wealth from creditors' claims
- Internal flexibility: facilitates participation in management and maintenance of ethos of the partnership
Disadvantages of an LLP include:
- Lack of privacy - financial information must normally be disclosed
- Requirement for an LLP agreement: this is needed to avoid default provisions applying and to cover situations not addressed by default provisions
Do contact us if you would like further help or advice on this subject.