Limited Liability Partnerships

Question 1

How is an LLP formed? (3 points)

Answer 1

• an LLP is 2 or more persons carrying on a lawful business with a view to make profit
• must incorporate the LLP at Companies House by filling out the relevant form and paying a fee (the form must state the name, registered office, members, and designated members)
• Registrar of Companies will then send a certificate of incorporation with a number, and the LLP is incorporated on the date stated in the certificate

Question 2

what information is subject to continual registration throughout the life of the LLP? (7)

Answer 2

• annual confirmation statement
• annual accounts
• change of name
• change of registered office
• change in membership
• creation of a charge (security)
• internal register of members and register of persons with significant control (at least 25% interest in the LLP)

Question 3

what types of members are there in an LLP and what is the minimum amount of members required for the LLP?

Answer 3

an LLP must have 2 members at all times

at least 2 of the members must be DESIGNATED MEMBERS

Question 4

how do individuals become members of an LLP?

Answer 4

they must subscribe to the incorporation document

if they become members later, this requires an agreement with the existing members

Question 5

what is a designated member?

Answer 5

obligations include singing accounts on behalf of the members, making filings at companies house, acting on behalf of the LLP, etc.

Question 6

when will a member cease to be a member of the LLP? (4)

Answer 6

1) death

2) agreement with other members of the LLP

3) giving notice to the other members of the LLP

4) dissolution of a corporate member

Question 7

what aspects of an LLP are corporate (similar to a company)? (5)

Answer 7

• separate legal personality
• limited liability for members
• Companies house incorporation and continuing obligations to file information including annual accounts (loss of privacy and higher costs)
• capable of creating a floating charge over LLP assets
• members may be liable for fraudulent trading, wrongful trading, disqualification, insolvency procedures

Question 8

what aspects of an LLP are like a partnership? (4)

Answer 8

• no share capital or capital maintenance requirements
• no distinction between owners and management
• more flexibility in determining structure of LLP, profit sharing, management duties, decision-making, etc. (this is why a members agreement is recommended)
• tax transparency

Question 9

why is it advisable to have a Member’s Agreement in an LLP?

Answer 9

LLPs have the benefit of great flexibility in determining structure and management so an agreement is recommended to deal with terms of the LLP

otherwise default provisions under 2001 Regulations Regs 7 and 8 will apply in the absence of an agreement

Question 10

under default provisions, how do members share in profits, capital, and losses?

Answer 10

equally

Question 11

under default provisions, who can take part in management

Answer 11

any member

Question 12

under default provisions, are members entitled to salary /remuneration?

Answer 12

no

Question 13

under default provisions, when can a person become a member?

Answer 13

unanimous consent of all existing members

Question 14

under default provisions, can a member dispose of their membership to someone else?

Answer 14

a member cannot assign their membership to someone else without the consent of all existing members

Question 15

under default provisions, how is decision making conducted?

Answer 15

mostly by majority

but unanimity is required for changes in nature of the business, including adding members, assignment of membership

Question 16

what are the requirements to maintain records under default provisions? (2)

Answer 16

• books and records of the LLP must be available for inspection by members at the registered office
• keep internal register of members and PSC

Question 17

under default provisions, what are some provisions that reflect the fiduciary relationship? (4)

Answer 17

• full and true disclosure of accounts and info affecting the LLP to a member of the LLP
• duty not to compete without consent of members
• duty to account for profits made if breached duty of non-compete
• duty to account for benefits derived from transactions made with the LLP or with LLP property

Question 18

under default provisions, when can a member be expelled?

Answer 18

no provision for implied power of expelling a member by the majority

so, in effect, impossible without a written agreement

Question 19

how is an LLP taxed?

Answer 19

• an LLP is treated as a partnership for tax purposes so there is tax transparency
• the LLP is not liable to pay tax itself but rather partners are individually liable to pay income tax on their shares of the profits and capital gains tax on their share of the chargeable gains according to an agreed profit sharing ratio (otherwise in equal shares)

Question 20

can an LLP register for VAT to become a taxable entity?

Answer 20

yes - the LLP itself can register for VAT

not the members themselves in respect of taxable supplies of the LLP

Question 21

if a member incurs liability or makes payments while conducting business, under default provisions, what must the LLP do?

Answer 21

An LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP

Question 22

what are the advantages (4) and disadvantages (3) of an LLP?

Answer 22

advantages:
- partners liability is limited to amount paid under the agreement = LLP has SLP
- flexible organisational structure = partners can decide it in a members agreement
- easier financing = as a separate legal entity, LLP can borrow in its own name AND create floating charges as security
- tax transparency

disadvantages:
- set up costs to incorporate LLP + legal fees + time to form
- registration and accounting requirements to Companies House
- less privacy = required to file annual accounts etc