Since its introduction under the Limited Liability Partnership Act 2000, the Limited Liability Partnership (LLP) has become an increasingly popular legal structure. Its ability to combine limited liability with the tax status and flexibility of a partnership has contributed to its rising prominence as a corporate vehicle. Although originally devised to provide professional partnerships with greater liability protection, it is not limited to this and is often used elsewhere, equity joint ventures for example.
Characteristics of an LLP
An LLP is a legal entity separate from its owners with at least two members. It is governed by legislation and a membership agreement; it is subject to incorporation and filing requirements; and holds the assets of a business. Default legislative provisions apply but can be displaced in a comprehensively drafted agreement. Managers may be members or appointed individuals. Liability of members is limited and the partnership is liable to the extent of its assets. However, following a winding up, claw-back provisions exist relating to assets withdrawn from the partnership in the two years prior if the member ought to reasonably have known the LLP was unable to pay its debts.
The LLP's capital is provided by its members and can be returned at any time while profits and losses are shared as per the agreement. There is no restriction on the maximum number or nationality of members; entry and exit is generally governed by the agreement. An LLP is taxed as a partnership - as if the assets were held directly by its members, although certain restrictions have been introduced. Members are protected from unfair prejudice but, in the case of corporate partners, this is usually excluded by agreement.
Advantages
In simple terms an LLP offers the limited liability of a company with the tax treatment of a partnership. In addition, it is more flexible than a company with no capital maintenance rules and a private constitution. Compared to a partnership it has limited liability, it can grant security and there is continuity in the event partners pass on their interests.
Disadvantages
It is a less familiar structure and the governing legislation is not set out in a single piece of legislation, such as the Companies Act. It relies on several statutes and regulations while partnership-type default rules can apply unless modified in the agreement. The claw back provision leaves residual risk for any member that withdraws assets in the two years before a winding up and director-type liabilities such as wrongful trading exist. Other disadvantages are that it cannot issue shares to the public, accounts must be filed publicly and a number of specific tax considerations exist.
It is important for business people considering entry to an LLP to take legal and financial advice. A carefully prepared LLP agreement will also ensure that the relationship between an LLP's members are defined by a clear set of rules from the outset.
For more information on Limited Liability Partnerships please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by phone on 020 7611 4848.
