Setting up an LLP and becoming a member of an LLP has some advantages and disadvantages. The aim of this document is to outline the process of incorporating an LLP, as well as the pros and cons. Tax advice is outside of the scope of this paper.
Definition of an LLP
LLPs have been described as a hybrid of a Partnership and a Limited Company. An LLP is a body corporate with a legal personality separate from its members. Changes in an LLP's membership do not affect its continued existence. LLPs are governed by their relevant partnership deeds and the Limited Liability Partnerships Act 2000 with the following requirements:
- There must be two or more persons (there is no limit on the maximum number of people) associated for carrying on a lawful business with a view to a profit and the persons must subscribe their names to an incorporation document.
- LLP members may be individuals, companies, other LLPs or other legal persons, but not unincorporated bodies.
- A Form LL IN01 must be filed at Companies House to incorporate the LLP. Information such as the name of the LLP, member and designated members and registered address of the LLP must be provided.
- Designated members are those who have additional responsibilities such as producing annual returns, annual accounts and providing information if the LLP is wound up.
Key areas to consider
- LLP members are classed as self employed, this brings several changes to that of an employee especially in relation to tax.
- Members will no longer have contracts of employment, instead all contractual terms will be covered in the partnership deed.
- n LLP has the organisational flexibility of an ordinary partnership, for instance, there is no statutory requirement to hold board meetings or general meetings or any legal formalities such as incorporating Articles of Association. Instead, it is governed by its partnership deed and the Liability Partnerships Act 2000.
- The LLP may be wound up by the court if it does not start its business within a year from its incorporation or suspends its business for a year.
- LLPs must keep accounting records which must be filed annually at Companies House.
- LLPs members have limited liability generally, they do not need to meet the LLP's liabilities. However, in some circumstances a member may have to contribute to the LLP's assets.
- An LLP is taxed as a partnership.
- An LLP has the flexibility of a partnership as the members are free to agree:
- who is responsible for management and how decisions are made;
- the circumstances in which members retire;
- how to share profits; and
- when and how new members are appointed.
- An LLP has no share capital. There are no capital maintenance requirements and unless otherwise agreed between the members, there is no obligation for members to contribute capital to the LLP. This capital flexibility can be very useful since it means the strict capital maintenance rules applying to companies do not apply to LLPs.
Allocation of profits and losses under the LLP
Members’ shares of profits and losses are paid and determined in accordance with the partnership deed. Loss allocations are usually in the same proportions as the profit allocations. Losses are typically rolled forward into the next accounting period and are set off against the following year’s profit share.
Members usually have a member’s current account. If a member leaves with a negative current account balance, the LLP can debit against his capital to clear the balance, if there is still an excess, then the member may be required to clear the outstanding amount from his own funds.
Disqualified or Insolvent Members
If a member is disqualified or becomes insolvent or bankrupt that member can no longer participate in the management of an LLP.
Salaried Members and Equity Members
LLPs can consist of a mixture of Salaried and Equity Members. Salaried Members are described as individual members working for an LLP who are remunerated as though they were employees and whose role does not in other ways have the characteristics of a partner. They are treated for tax purposes as though they are employees. However, this is solely for tax purposes as an LLP member cannot be an employee there are several cases surrounding this notion.
Key documents for business transferred to the LLP
Due diligence questionnaire- an LLP would usually issue one of these in order to obtain specific information about the target business or company, such as information about the volume of business, details of any complaints or claims and corporate governance information. It can be argued that the management of the target business already know everything, but our experience tells us that by addressing the questions posed, even if not formally in writing, the target business and LLP will understand considerably more about what has to be included in the transfer, and further, fewer matters are forgotten until it is too late. It often provides a useful checklist.
Transfer Agreement- setting out the terms and conditions upon which the LLP assumes the business and liabilities of the target business, and what is excluded. The usual route will be for the target business to be owned by the LLP afterwards as a shell company with no assets, and all of its liabilities and responsibilities either to be met or undertaken by the LLP.
Share Sale Agreement- it will depend on the tax advice that is received, whether this is required, and indeed when this will occur. Assuming that the Transfer Agreement deals with the assets and liabilities then this agreement should be relatively short and straightforward. However, it would need to cover such matters as residual tax liabilities too, and a separate tax indemnity may be required.
LLP Partnership Agreement- setting out the rights, duties and obligations of partners, including, how profits and losses are split, how frequently board meetings occur, how new and outgoing members are dealt with.
LLP Participation Agreem- setting out the capital and income participations of the partners in the LLP.
Restrictive Covenant Deed- tying in the partners in relation to the future protection and promotion of the business of the LLP. It is to be noted that covenants in partnership deeds are likely to be seen by the Courts as more enforceable than those in employment contracts.
Property Assignment- with assets on business transfers, there often needs to be a transfer of lease (which will require obtaining a licence from the landlord) or freehold title.
Goodwill Assignment- an assignment of the goodwill of the target business, such as name, trademarks and domain names.
Intellectual Property Transfer- the transfer of the name, domain names and trading style of the target business.