What is an LLP?  An LLP is a hybrid between a limited company and a general partnership offering limited liability to its members whilst retaining the tax transparency and flexibility of a partnership.
It is formed by two or more persons associated for carrying on lawful business with a view to a profit.
Flexibility and Simplicity of Structure An LLP has the organisational flexibility of a general partnership which allows its members to agree on how the day to day running of the partnership will be managed.
It does not have a memorandum or articles of association or a specified management structure. In practice, however, the LLP will normally have a written LLP agreement or in the absence of such agreement, it will rely on the default position contained in legislation. An LLP agreement will typically deal with matters such as:  
  • allocation of profit and loss;
  • allocation of drawings;
  • ownership of property;
  • meetings and decision making;
  • admission of new members;
  • retirement of members;
  • entitlement of members on exit;
  • indemnities and insurance; and
  • restrictive covenants.
The LLP provides a flexible and convenient structure to adjust the interests of members in the LLP either amongst themselves or between existing members and new members without the need to deal with, what can be, complicated share arrangements as would be the case with a limited company. Unlike a general partnership, changes to membership do not affect the LLPs continuing existence.
Other features that make the LLP structure so flexible include the absence of share capital and the associated capital maintenance requirements. Payments (both of capital and income) can therefore be made to members by way of capital repayment, loans and/or profit allocation. Also, whilst a company makes a rigid distinction between the role and duties of shareholders and those of directors, no similar distinction is made in an LLP. LLPs are entitled to specify their own governance structure which may or may not allocate specific roles and responsibilities to individual members. This makes for a more flexible governance structure.
 Separate Legal Personality An LLP is a body corporate with a legal personality separate from that of its members with its own rights and liabilities distinct from those of its members. An LLP can therefore:
  • enter into contracts in its own name;
  • sue or be sued in its own name; and
  • buy, sell and lease property in its own name.
When members agree that the LLP is to enter into a contract, they bind the LLP. And when the LLP commits a tort, the LLP is liable in much the same way as a company. However, unlike partners in a general partnership, the members of an LLP are not jointly liable for contracts entered into by the LLP or for the tortious acts of another member.
Unlike a partnership, an LLP may issue debentures and give fixed and floating charges over its assets in the same way as a company. Borrowing is therefore often made easier by virtue of the ability to grant such charges over its assets.
 Limited Liability The liability of the members of an LLP for the debts and liabilities of the LLP is limited to the amount they have contributed to the LLP.
Unless otherwise agreed, the members would not normally bear losses of the LLP save in the event of an insolvent winding up where there is the ability to “claw back” from members’ distributions made in the two previous years prior to winding up which should not have been made (e.g. where the LLP was insolvent or the making of the distribution made it insolvent and the members making such distributions knew or ought to have concluded that there was no reasonable prospect of the LLP being able to avoid insolvency). Members of an LLP may also be liable to contribute to the assets of the LLP on a winding up if they are guilty of fraudulent or wrongful trading.
Two additional points are however worth noting:
  • whilst members are protected from direct liability for the negligence of other members and employees, they may however be liable if they have personally acted negligently and the claimant can show that he entered into the arrangement relying personally on the member as well as the LLP; and
  • banks and landlords or any third party to which the LLP has agreed to grant security may still require personal guarantees from the individual members of an LLP thereby reducing the value of limited liability.
Duties and Responsibilities The duties of the members of an LLP are usually set out in an LLP agreement. Legislation lays down a minimal legal framework for the operation of an LLP, leaving most of the detailed rules to be worked out between the parties.
Recent case law indicates that the duty of good faith (of the kind imposed by law on partners in a traditional partnership and which has been described as a duty of ‘open, fair and honourable dealings between partners in relation to the partnership and all its affairs’) does not automatically exist between members of an LLP or between the members of the LLP and the LLP itself. Members of an LLP may therefore choose whether they want to provide for an express duty of good faith in the LLP agreement or alternatively the LLP agreement may state that no such duty of good faith is to be implied.
Members are agents of the LLP and the usual fiduciary obligations which an agent owes to his principal in relation to the transactions which the agent enters into on the principal’s behalf will apply unless expressly excluded or modified. These obligations may include a duty to account to the LLP, to avoid a conflict of interest and to avoid taking a benefit from transactions concerning the LLP.
In order to assess whether and what fiduciary duties apply, it will be necessary to look at the specific roles and responsibilities arising in the particular context. Members who have little or no input into the operation of the LLP are unlikely to be in the position of a fiduciary.
Legislation also sets out specific default duties owed by members to the LLP, including not to compete with the LLP and not to take benefits from transactions concerning the LLP. In both cases, however, these obligations can be waived either by express consent or under the terms of the LLP agreement.
It should be noted that the statutory duties of directors (other than in respect of the preparation of accounts) as set out in the Companies Act 2006 do not apply to members of an LLP because:
  • the position of members of an LLP does not equate to that of directors of a company; and
  • no legal distinction is made between the owners of an LLP and its management.
Designated Members An LLP must have at least two ‘designated’ members. If no member, or only one member, is designated then all members will be deemed to be designated. Designation imposes administrative obligations on the relevant member, akin to the obligations of a director or secretary of a company. These obligations include filing returns, accounts and other documents with the registrar of companies, and acting on the LLP’s behalf in any winding-up or dissolution procedure. Failure to comply with these obligations may leave the designated member open to potential civil and criminal penalties.
Tax Despite the fact that an LLP is effectively a corporate vehicle, it is generally treated for tax purposes as though it is transparent. That is, the LLP is not subject to tax on its profits. Instead its members are subject to tax on their share of the profits. This tax “transparency” applies provided the LLP is carrying on a trade or profession (or business) with a view to profit.
LLPs can accordingly be attractive vehicles for tax purposes. Profits made through companies generally suffer higher taxation – either because profits already subject to corporation tax are paid out by way of a taxable dividend or because salaries are paid which attract both income tax and employer’s and employee’s national insurance contributions (NICs).
By contrast profits made by the members of an LLP only bear income tax and self-employed NICs (which are much lower than employer’s and employee’s NICs combined). Indeed, HMRC has confirmed its view that members of an LLP cannot be taxed as employees and must therefore be self-employed for tax purposes. This rule applies even if, for example, they were previously employees of a partnership which has incorporated into an LLP. This makes it possible to make a significant proportion of the workforce members of the LLP and reduce the NICs further. Whether HMRC will continue to hold this view in the future currently remains unclear.
Tax transparency applies in similar circumstances for capital gains tax purposes. This means that any gains made on the sale of capital assets will generally only be assessed in the hands of the members, not in the LLP itself. This transparency is generally lost if the LLP ceases to carry on a trade or profession, though HMRC has confirmed that this would not generally happen in the course of an orderly winding up of an LLP.
An interest in an LLP is not a chargeable security for stamp duty purposes and a transfer of any such interest would only attract stamp duty to the extent that the LLP owned shares. Stamp duty land tax charges can arise on the transfer of an interest in an LLP which owns land.
Only for VAT purposes is an LLP never regarded as tax transparent. The LLP must be registered as a separate VAT entity (as must ordinary partnerships). Nevertheless HMRC has confirmed that members will not be considered to be supplying services to the LLP, so that they will not have to obtain registrations individually.
Companies considering converting to an LLP should note that a straightforward transfer of their existing business into an LLP could result in tax charges. Specialist advice should be sought on any intended conversion.
Privacy The LLP agreement, like a partnership agreement, is a private document and there is no obligation to file it with the registrar of companies. However, LLPs do need to make certain information public and the filings that an LLP must make are broadly the same as those of a company. An LLP must provide to the registrar of companies (amongst other things): details of its members together with any changes in the membership of the LLP, an annual return and (subject to any exemptions for small or dormant LLPs) audited annual accounts. All such information is publicly available, although members are able to provide an address for service rather than their home address for the public register.
Employment Status  Members of an LLP do not normally have employee status. The scope of employment legislation applicable to them is therefore limited. The test as to whether a member is an employee or is genuinely self-employed is not, however, determined by their title. Unlike in a general partnership (where partners cannot by definition be employees), even though an individual may be a member of an LLP, he may also be an employee. Determining whether a member is in fact an employee will depend upon the specific set of circumstances and the terms of the LLP agreement. An employment tribunal will look at considerations such as whether the member genuinely shares in the risk and reward of self-employment, whether they have invested in the business, whether they share in the proceeds if the business is sold and whether they stand to lose any money invested should the business fail.
The answers to these questions will give an indication of whether the member is an employee or not and therefore whether they would potentially have the right to claim unfair dismissal, statutory redundancy payments, statutory maternity and paternity pay, statutory sick pay and parental leave.
Entitlements of outgoing members There are no default provisions as to the financial consequences of a member leaving an LLP or on death. Accordingly, in the absence of agreement between the members, an outgoing member has no express statutory right to receive any payment for the value of his ‘share’ in the LLP, either from the continuing members or from the LLP itself.
An LLP agreement should therefore detail the financial consequences on an outgoing member, dealing in particular with the treatment of the outgoing member’s financial interest with regard to profits, sums contributed as capital, sums advanced to the LLP by way of a loan and any value attributable to the goodwill of the LLP.
If no provision is made in the LLP agreement as to the financial consequences of a member leaving any capital will accrue to the other members and the surplus value of the assets will remain with the LLP until appropriated to members.