Limited Liability Partnerships (LLPs)

Limited Liability Partnerships (LLPs)

Limited Liability Partnerships (LLPs)

Limited liability Partnerships were established under the Limited Liability Partnerships Act 2000. Partnership law (Partnership Act 1890) does not apply to an LLP.

The LLP can own the business’s assets in its own name and is liable for its own debts. Anyone lending money to the LLP (such as a bank) may still require personal guarantees from the members, as they frequently do with directors in a small company.

LLPs have to be officially documented and registered at Companies House, unlike an unlimited partnership.

LLPs are a  popular business model offering a variety of benefits to individuals, including reduced personal liability for the debts of the business. LLPs has similar features to that of an unlimited partnership, however the key difference it the LLP has its own legal status.

The individual partners are referred to as ‘members’ of the LLP (not ‘partners’), profits incurred in the LLP are split between the members, the responsibility of paying tax therefore falls on the members and not the LLP itself. Members are taxed as partners, each being liable for tax on their share of the LLP’s income or gains.

There is no limit on the maximum number of LLP members. Although an LLP must have two formally appointed members at all times.

Key features of an LLP

The key features of an LLP are that:

  • it is a separate legal entity (unlike a general partnership). An LLP is incorporated by registration at Companies House.
  • LLP members have limited liability – for example, they do not need to personally pay for the LLP’s liabilities. However, in some circumstances a member may become liable and have to contribute to the LLP’s debts.
  • it is taxed as a partnership.
  • an LLP has the organisational flexibility of a general partnership – unlike a limited company where the Companies Act 2006 sets down strict default provisions. The members are free to agree: how to share profits; who is responsible for management and how decisions are made; when and how new members are appointed; and the circumstances in which members retire.
  • an LLP agreement is a private document that is confidential to the members and does not need to be registered at Companies House.
  • it has no share capital – which means that it does not issue shares to its members.

Buying and Selling an interest in an LLP

It is possible for a member to sell their interest (or ownership share) in an LLP. If an LLP member wants to transfer all of their stake on an LLP the best approach would be for the buyer to be admitted as a member of the LLP at the same time as the seller leaves it (this would usually require the agreement of all of the members of any existing LLP agreement). The buyer may pay a purchase price to the seller for giving up their rights and arranging the sale. As usual in a sale, a properly drafted sale agreement is advised that provides for one member to retire and assign their financial interest to a new incoming member who would become a member simultaneously.