When setting up a limited liability partnership, it’s common to put in place a limited liability partnership agreement – which you might also see called a members’ agreement, LLP agreement, partnership agreement or deed of partnership. Most limited liability partnerships set up an LLP agreement.
A limited liability partnership agreement is a legally binding contract made between the members of the LLP (sometimes with the LLP itself as another party to the contract). It outlines the rights, duties, responsibilities and liability of each member and sets out how the partnership will be managed and run. The overall purpose is to establish a fair relationship between individual LLP members, protecting their respective interests and investment.
A limited liability partnership agreement may be verbal or written, although the latter is far more common and straightforward to enforce. If it’s enshrined in a written document, there’s still no need for an LLP agreement to be filed with Companies House (unlike the articles of association of a private limited company) or, unless the rules of a particular industry require it, any other government body.
It can therefore be kept private, meaning the contents remain confidential between the members and not available to employees, customers or the general public.
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An LLP agreement can be as straightforward or complex as needed in the circumstances. For simple cases, a template limited liability partnership agreement can be purchased online, although it’s still sensible to review the contents and make amendments to reflect your circumstances. Larger professional practices and those requiring bespoke provisions will need more complex agreements, which will usually involve drafting by a solicitor or accountant.
In purpose and content, an LLP agreement will often resemble the partnership agreement entered into by partners of a traditional partnership. As well as other differences, however, a limited liability partnership agreement must take account of the fact that LLP members have limited liability. If the LLP is formed by incorporation of an existing partnership, any partnership agreement that already exists does not automatically continue: in any case, the terms would need to be carefully reviewed to check whether they’re appropriate for the LLP.
Why should an LLP agreement be put in place?
For LLPs, there’s no statutory equivalent to the articles of association required for private limited companies. It’s not a legal requirement to enter into a limited liability partnership agreement and an LLP can be set up without one. However, it’s a very common and generally sound recommendation that a new LLP puts a partnership agreement in place.
A well-drafted LLP agreement can:
- Provide clarity and certainty about members’ expectations;
- Help to avoid unnecessary misunderstandings or disputes; and
- Provide a framework of rules to manage those disputes that do occur
Without an LLP agreement, or where an LLP agreement is silent or badly drafted, an LLP will be governed by the “default provisions” set out in the Limited Liability Partnerships Act 2000 and Limited Liability Partnerships Regulations 2001, which set out certain rights and obligations on LLP members.
These default provisions include:
- That all members are entitled to an equal share of capital and profit, even if they have invested different amounts in the business
- That all members equally participate in management of the business of the LLP with equal voting rights
- That unanimous consent is required for the introduction of new members
- That there is no power to expel a member without his or her consent, for any reason
- That the LLP will indemnify members in respect of expenses they incur in relation to the LLP
Relying on these default provisions, therefore, it’s impossible forcibly to expel members, to control how profits are distributed, for members to have different levels of authority or even to force a member to come in to work. Most LLPs will therefore look to put in place a limited partnership agreement, which will override those areas of the statutory provisions that aren’t suitable for their LLP.
In addition, the provisions under the Limited Liability Partnerships Act do not offer solutions in many common scenarios or areas where the members would expect protection. Having a written LLP agreement in place gives members the opportunity to establish agreement in other areas.
What does an LLP agreement include?
The exact contents of a limited liability partnership agreement will be based on the circumstances and needs of the LLP and its members, who have significant freedom to agree whatever terms they deem necessary and appropriate. One agreement might differ from another significantly in scope, content and complexity. For those reasons, it’s prudent to seek the advice of a solicitor or accountant before putting an agreement in place to ensure it best meets the needs of the LLP members.
However, common provisions within a limited liability agreement include:
Basic details about the LLP
- The business name
- The registered trading address
- The nature of the LLP’s business
- The names of members party to the agreement
- Which members will be designated members
- Any upper limit on the number of members
- Details of the process for appointing new members
- Provisions for what happens on the death of a member, if they retire or otherwise choose to leave
- Any provisions for expelling members, including the circumstances in which they can be triggered
- Working arrangements, including any expectation about who does which tasks and how much time each member should contribute to the LLP’s business
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- How much capital the members are required to put into the LLP
- Any other provisions related to how the limited liability partnership is to be financed.
- How profits and losses of the LLP should be shared between the different members
- Whether any of the partners are to be paid a salary or can otherwise extract remuneration from the company
- Accounting policies, banking arrangements and other financial procedures
- What types of assets can be owned by the LLP and how they will be dealt with
Managing the LLP
- Procedures for day to day management of the LLP
- Rules around decision making, including who can take decisions and which decisions require agreement between some, a majority or all members
- Whether, when and how member meetings will be held and how decisions will be made at those meetings.
- Any restrictions on an individual member’s authority to bind the LLP.
Member disputes and LLP dissolution
- Procedures to resolve disputes between members of the LLP
- Non-competition conditions if a member leaves the LLP, which might include not engaging with the LLP’s customers or staff as well as confidentiality of information
- The circumstances in which the limited liability partnership might be wound up and the procedure to be followed
When should an LLP agreement be put in place?
It’s usually best to put an LLP agreement in place when the partnership is registered at Companies House. At that time, the members are most likely to be able to reach agreement about what they expect to give and receive from the company. While you might have every intention of returning to the task at a later date, a good opportunity may never arise and, by then, the members’ expectations and attitude to the business are more likely to have diverged. That would make is much less easy to agree content of an LLP agreement.
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