LLP agreements
It’s always good to know that any business partnership you enter into is protected and that, more importantly, so are you. Depending on the type of business arrangement you enter into, it’s always wise consider protecting yourself with a written agreement, even if the person you’re going into partnership with is a good friend or even a family member.
What is an LLP agreement?
A limited liability partnership sits somewhere in between a limited company and a partnership. It enables anyone who is a party to it some measure of protection, which is somewhat more than partners in standard partnership.
The key features of an LLP are that:
- It is a legal agreement that’s separate from any other type of arrangement you may enter into.
- LLP is registered at Companies House, and responsible for its own contracts and liabilities.
- Generally, LLP members have limited liability and do not need to meet the LLP’s liabilities.
- LLPs have what is referred to as a ‘hybrid’ nature, meaning that they can be adapted and changed
to suit the particular business needs. As well as offering a greater level of personal asset protection
compared to a standard partnership It it also gives members a lot more control over how profits are
shared out, who makes decisions, how the business is managed, and when and how new members
are appointed.
What about tax?
LLPs are ‘tax-transparent’, meaning that they do not pay UK corporation tax or capital gains tax. Instead the income generated by an LLP company is distributed as gross income to the partners, who are registered as self-employed, rather than as PAYE employees.
So what happens if there is no LLP agreement?
You’re in no way obliged to draw up an LLP agreement but you will be reliant on legislation if you don’t and the outcome may not be what you envisaged, for example:
- All members are entitled to equal shares in the capital and profit.
- Every member may take part in the management of the business.
- No member is automatically entitled to payment for taking part in the business.
- Unanimous agreement is required to allow any new member to join the LLP.
- Ordinary decision-making requires only a majority of members to agree to any changes, so some interests could be side lined or effectively railroaded by other members of the LLP.
- There is no duty to account to the LLP for profits from a separate or even a competing business of any member.
- A member cannot be expelled by a simple majority of members.
- Members will need to rely on the Companies Act 2006 as protection against “unfair prejudice”.
Any of these could result in a protracted and expensive dispute so it’s essential that the wording and structure of the LLP agreement is agreed by all parties and utterly transparent from the very start.
Tiger Law can help you ensure that your LLP is square with the law and not a recipe for dispute and expensive legal action in the future. You and your colleagues and partners stand a far better chance of staying friends and advancing your business objectives for years to come for the sake of a little time spent now making sure everything is A-OK with your agreement.
