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Following our recent blog post on forming a Limited Liability Partnership, we alluded to the possibility of receiving poor quality advice both on the formation of an LLP and the tax consequences of an improperly planned LLP formation.
There is further scope for mis-advice however, that is the failure to prepare a proper LLP partnership agreement. We have recently witnessed such an “agreement” that had been produced by a firm of accountants out of what was previously a “film partnership agreement”.
The clients had been told that the details had been left vague so that they could “amend later on”.
The whole point of having any agreement is for certainty.
Our publication Partnership Protection and Shareholder Protection provides guidance on how to draft both unlimited partnerships and shareholder agreements. Limited Liability Partnerships are quite different.
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP one partner is not responsible or liable for another partner’s misconduct or negligence. This is an important difference from that of an unlimited partnership.
The key advantage of a LLP compared with a traditional partnership is that the members of the LLP (it is important that they should not be called partners but members) are able to limit their personal liability if something goes wrong with the business, in much the same way as shareholders in a limited company are able to.
Where business owners have wanted to limit their personal liability in the past, they have normally set up limited companies and any profits made by those companies are subject to corporation tax. Dividends paid by the companies can then be taken as income of the shareholders. LLP’s are taxed quite differently in that the profits are treated as the personal income of the members as if they had run their business as a partnership. The taxation of companies and partnerships is very different but taxation should not be the main consideration in choosing a business vehicle.
As to flexibility, the most important benefit is in the ability to separate out different rights. For example, a party funding a new fund might be given rights to income (and then, only income from the fund they are funding). An individual being made a member, or a retiring member, might also be given rights to a fixed level of income only, leaving the founders with the majority of voting rights and rights to assets on winding up.
Some founders or other key team members might be given a different percentage of, say, voting rights compared to income rights. All of these differing rights can be comfortably accommodated in the members’ agreement.
It is important therefore that any LLP agreement is drafted by a specialist who will be aware that an LLP requires a different type of agreement, it must be a comprehensive agreement governing the duties and responsibilities of the members is a necessity, therefore, and it will need to include provisions for:
- The management of the LLP
- The decision-making process
- The capital contributions required of the members, both while a going concern and (if any) on liquidation
- The division of profits
- Changes to the membership
- Dispute resolution
- Termination of the LLP
- Provision for the amendment of the LLP agreement
Contact one of our Financial Planning Consultants if you require advice on the setting up of an LLP agreement or any other issues relating to managing change in business or corporate planning.