Put your business partnership onto a secure footing with a limited liability partnership agreement (LLP) that limits your liability and sets clear rules for sharing power and profits. This straightforward limited liability partnership is ideal for businesses run by several owner-managers as it combines the flexibility of traditional partnership with the benefits of corporate limited liability. This document deals with the key issues to be agreed between LLP members such as incorporation, finances, ownership, contributions, profits and losses, decision-making, risk management and members leaving.
When should I use an LLP agreement?
- to clarify the partners' contributions to and their capital shares in the LLP
- to set out the partners' profit shares
- to set out how decisions are made
- to define what is expected of the partners
- only for LLPs registered in England and Wales
What's included in an LLP agreement?
This LLP agreement covers
- who the members are
- initial set-up considerations and general administration matters
- members' capital interests and profit shares
- members' duties and entitlements
- management and decision-making
- risk management
- members leaving
What's an LLP agreement?
A limited liability partnership (LLP) agreement is a type of business partnership agreement which combines the flexibility of traditional partnership with the advantages of corporate limited liability.
Do I need an LLP agreement?
This LLP agreement is ideal for businesses which are run by several owner-managers. Not only does it limit liability but it also sets clear rules for sharing power and profits. It provides a sound basis for the operation of a partnership and deals with a variety of aspects from incorporation and decision making through to members leaving.
How do I register an LLP?
You must register your LLP at Companies House. When you do this, you will get a certificate of incorporation, which will include the registered number of the LLP and the date of registration. When choosing a name, make sure it is not already being used by someone else.
What is the registered address of an LLP?
The registered address is the LLP's official "home" on record at Companies House. All official correspondence addressed to the LLP is sent to its registered address. The LLP may operate on a day to day basis from a different address to its registered address.
What is the date of incorporation?
The date of incorporation is the date when the LLP is registered at Companies House and is on the certificate of incorporation.
What is the end of an accounting year and can it be changed?
An accounting year, or "financial year", is usually a 12 month period for which the LLP has to prepare accounts. For new LLPs, the year end date will automatically be set as the last day of the month after the first anniversary of the LLP's incorporation. But you can agree to change this to a more convenient date, using form LL AA01 available from Companies House.
What are LLP designated members?
Designated members are responsible for making sure the LLP complies with its legal obligations and they have authority for money transfers. This LLP agreement makes all members 'designated members', so all members are equally responsible. An LLP must have at least 2 designated members by law.
How do I control finances in an LLP?
It's common to say in LLP Agreements that cheques and money transfers above a certain threshold - which you can set in this LLP Agreement- need to be authorised by at least two designated members. Amounts below the threshold can be authorised by one designated member. Any borrowing, lending, guarantee given or purchase made by the LLP above this amount will also need the consent of all the members. The threshold will depend on the type of business and the sort of amounts typically involved on a day-to-day basis.
When can members draw money in advance of expected share of profits?
On a specified day of each month, members can draw down their profit share during the year, rather than wait until annual accounts have been drawn up after the end of an accounting year. However, members must be careful to ensure that what they draw from the LLP on account of expected profits are realistic amounts based on profits actually made.
How do I decide what members are contributing to the LLP?
When setting up an LLP, you can include a schedule listing the property owned by the LLP at the start of the agreement. This provides a record of what each member has contributed to the LLP (ie cash or non-cash assets) at the beginning. It can also show what the individual members intended will not be owned by the LLP, but instead lent or licensed to the LLP. If a member contributes assets rather than money, the amount which the members agree makes up the value of those assets must be determined.
What are the LLP tax options?
Rather than distribute to the members their "gross" profit share (ie including tax), you can make the LLP responsible for holding back the tax the auditors expect will be due from the members. This approach helps ensure that members pay their tax on time and avoids the risk of a member becoming bankrupt and jeopardising the LLP and its assets.
What happens if a member has withdrawn too much money?
If a member has withdrawn more money than they are actually entitled to in a year they can repay the excess at an interest rate which is a stated percentage above the base rate of the bank where the LLP has its account.
What other matters should be decided in an LLP agreement?
There are many other matters which can be decided when creating this LLP agreement to ensure clarity of entitlements and decision-making. These include:
- annual leave entitlements, family leave provisions and repayment of expenses
- other entitlements (eg car allowance, private health insurance, pension scheme)
- minimum number of days' notice to hold a member's meeting
- when a members' vote is "tied", should the chairman have a casting vote?
- how many members need to be present at a meeting to ensure it's quorate/valid?
- can members vote by proxy?
- minimum number of months notice for a member to retire from LLP
- number of days a member has to remedy a serious breach of the agreement before the other members can expel them from the LLP
- restrictive covenants and geographical non-compete provisions on retiring members.
Ask a lawyer for:
- a business that is carried on through a general (not limited liability) partnership or another type of organisation
- converting an existing partnership into an LLP
- LLPs registered outside England and Wales
- LLPs in which any of the partners are not individuals
This LLP agreement is governed by the law of England and Wales.