Why should you have an LLP Agreement

Why should you have an LLP Agreement

Why should you have an LLP Agreement

No Comments on Why should you have an LLP Agreement

The first thing to consider is if you need an LLP at all or will a “normal” partnership suffice?

An LLP is a good idea if you are seeking some form of protection given by a limited company but wish to retain some of the flexibility  of a partnership.

As with a partnership it is very advisable to draw up a partnership agreement. This has to be slightly different for an LLP than it is for a standard partnership.

As in a partnership, when you form a new LLP, there is no written constitution as there would be with say a limited company.  If you do not enter into an LLP agreement, you will be regulated by the default provisions contained in the Limited Liability Partnerships Regulations 2001.  If you do not have an LLP Agreement you can land yourselves in a lot of trouble when it comes to agreeing drawings, control and especially dissolution if you fall out.

Just as it is a must for limited company shareholders to have a shareholders’ agreement, so should the members of an LLP have a Members LLP Agreement.

If you do not have any agreement the  Limited Liability Partnerships Regulations 2001 will impose the following:

Capital and Profits

All members of the LLP will be entitled to share equally in the capital and profits. This would be so even if members had contributed differing sums. If the members do not intend to share capital or profits equally, they would have to show an express agreement to the contrary which could be difficult to prove in the absence of a written LLP Agreement.

Liability of Members

As you might expect, the LLP will normally be obliged to indemnify its members acting in the conduct of its business.  But there may be occasions when members will become personally liable. This could apply even when the member has acted with the full knowledge and consent of the other members but outside what would normally be considered to be the `ordinary’ course of business.

Participation in Management

Every member is entitled to take part equally in the management of the business in practice. However,members will usually have different decision making roles and powers which should be set out in the LLP Agreement.

No entitlement to Members’ Remuneration

Without an express agreement in the LLP Members Agreement, members would only be entitled to take any return from the business by way of their profit shares. If they wish to be paid for their management or other services, this must be spelt out in the LLP Agreement.

 Majority Decisions

The decisions relating to ordinary matters of the business may be decided by the majority of the members, but any change in the nature of the business would require consent of all the members.  A Members Agreement would provide how decision making and voting is to take place.

Expulsion of Members

This can be a very important matter. How do you get rid of a member who has acted wrongly, or what happens if the member’s relationship breaks down?

Under the Regs the majority of members cannot expel another member without express agreement having been reached.     Most LLPs would need the power to give notice to a member in various circumstances, eg he/she suffers long term illness or commits a serious breach of his/her obligations to the LLP or the other members. However, in the absence of an express agreement, the other members cannot expel a member under any circumstances, and the only remedy in case of a dispute would be to wind up the LLP.

The sort of things you should be looking at to have in the agreement will be:

Appointment of Designated Members stating which  management functions will be undertaken by each of them.

Financial contributions to be made by members and how capital accounts should be maintained.

Maintenance of current accounts and the amount of drawings to be taken by each member.

Profits and losses and how these should be dealt with.

The obligations and duties of each member of the business, setting out the role each person would have and any limitation on their power to deal on behalf of the LLP eg restrictions on buying goods, services or property.

Members’ holiday entitlement, maternity and adoption leave

Voting rights of each member

Entitlement of members to motor cars or other benefits eg health care and retirement provision

The members are free to include any other provisions that they may agree in order to regulate the business of the LLP.

The LLP Agreement is a private document between the LLP and its Members. It is not registered at Companies House and its privacy will therefore be maintained.

If you wish to know more, or are looking to have an LLP drawn up,please contact me, Bob Jones, at bobjones@pinstripelegal.co.uk, or call me on 01291 430 124.

About the author:

Bob has spent many years working in commercial law, managing the claims and legal teams.

Leave a comment

Pinstripe Legal Services specialises in meeting all the commercial needs of your business efficiently thereby protecting you and improving your cost effectiveness and profitability.

We like to be social

Find us on Facebook and Twitter - drop us a line, we always love to hear from you!

How to find us.

Back to Top