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Limited Liability Partnership

Whether you know about them or not, limited liability partnerships are quite popular. Often your lawyer or your accountant will have the acronym LLP after a list of names. So learn what is an LLP? What it does for its members? and the reasons for forming one.

What is Limited Liability Partnership?

Professionals who use LLPs tend to rely heavily on reputation. Most LLPs are created and managed by a group of professionals who have a lot of experience and clients between them. By pooling resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. They can share office space, employees and so on. Most important, reducing costs allows the partners to realize more profits from their activities than they could individually.

The partners in an LLP may also have a number of junior partners in the firm who work for them in the hopes of someday making full partner. These junior partners are paid a salary and often have no stake or liability in the partnership. The important point is that they are designated professionals qualified to do the work that the partners bring in. This is another way that LLPs help the partners scale their operations. Junior partners and employees take away the detail work and free up the partners to focus on bringing in new business.

Characteristics of Limited Liability Partnership

A separate legal entity

An LLP is a separate legal entity from its Members. On incorporation it will be issued with a unique registration number by Companies House, in the same way as a limited company. This registration number will stay the same throughout the lifetime of the LLP, even if the LLP changes its name. Very similar restrictions apply to names that can be registered for LLPs as apply to limited companies.

An LLP itself has unlimited capacity and it can do anything that a natural person can do, including holding property, entering into contracts, suing and being sued.

Changes in the membership of an LLP do not affect its continued existence. However, it should be noted that if the membership of the LLP falls below two Members, and the LLP continues to trade for more than 6 months with just one Member, the benefits of limited liability are lost.

Limited liability

The Members of an LLP act as its agents and only have liability up to the amount they have contributed to the LLP – in particular their capital contribution and undrawn profits. This is a significant advantage over a traditional partnership where the partners generally have unlimited liability.

Taxation

Although treated as a separate legal entity from its Members, the LLP is treated for tax purposes as a partnership and the Members are taxed as partners, each being liable for tax on their share of the income or gains of the LLP.

Organisational flexibility

An LLP has the organisational flexibility of a partnership and the provisions dealing with the day to day running of the LLP will normally be contained in a written LLP agreement. An LLP agreement will typically deal with matters such as:

  • Profits and losses
  • Drawings
  • Ownership of property
  • Meetings/decision making
  • Admission of new members
  • Retirement/expulsion of members
  • Indemnities and insurance
  • Restrictive covenants

Any written LLP agreement is a private document which is confidential to the Members.

Designated Members

An LLP must have at least two “designated” Members. Designated Members have particular responsibilities and functions within the LLP which closely reflect those duties that would normally be carried out by a director or secretary of a company. They include:

  • Appointing an auditor (where appropriate).
  • Signing the LLP’s annual accounts and delivering them to Companies House.
  • Preparing, signing and delivering the LLP’s annual return to Companies House.
  • Notifying Companies House of any changes to the LLP’s membership, name or registered office address.
  • Acting on the LLP’s behalf if it is wound up or dissolved.

If the number of designated Members falls below two then every Member of the LLP is automatically deemed to be a designated Member.

Disclosure requirements

Every LLP must paint or affix its name on the outside of every office or place of business (even if it is a Member’s home), in a conspicuous position and in legible letters. The LLP’s name should also appear, in a legible form, on a number of business documents including:

  • Business letters and order forms
  • Notices and other official publications
  • Websites
  • Cheques, invoices and receipts

In addition, all business letters and order forms of the LLP, and all of the LLP’s websites, must specify the following in legible letters:

  • The place of registration and registered number.
  • The registered office address
  • In the case of an LLP whose name ends with the abbreviation “llp” or “LLP”, the fact that it is a limited liability partnership.

Failure to comply with any of these statutory requirements may result in a fine for the LLP and/or for all Members in default.

Accounting and filing requirements

LLPs are required to provide financial information similar to that required of companies. Examples of the documents that an LLP must file at Companies House include:

  • An annual return.
  • Annual accounts.
  • Notification of changes to the LLP’s membership, including changes to a Member’s status (from Member to designated Member or vice versa).
  • Notification of changes to the registered office address.
  • Details of any mortgage or charge created by the LLP.

Failure to file annual accounts on or before the due date will result in a fine being imposed by Companies House. Failure to file an annual return will result in the LLP being struck off the register at Companies House.

Advantages

Liability Protection

In general partnerships, each participant is personally responsible for the actions of the company. This includes debts, liabilities and the wrongful acts of other partners. One advantage of a limited liability partnership is the liability protection it affords. This type of partnership structure protects individual partners “from personal liability for negligent acts of other partners or employees not under their direct control,” states the SBA. In addition, individual partners are not personally responsible for company debts or other obligations. This is advantageous for an individual partner when potential lawsuits or claims of negligence against the business are concerned.

Tax Advantages

Individuals in a partnership are normally liable for filing personal income taxes, self-employment taxes and estimated taxes for themselves, according to the Internal Revenue Service. The partnership itself is not responsible for paying taxes. The credits and deductions of the company are passed through to partners to file on their individual tax returns. Credits and deductions are divided by the percentage of individual interest each partner has in the company. This can be beneficial for partners who have a limited interest in the company or special tax requirements due to their interests in other businesses.

Disadvantages

Because of the special structure of limited liability partnerships, taxing authorities in some states recognize the structure as a non partnership for tax purposes. This could possibly be a disadvantage for partners who require special tax consideration. In addition, unlike general partnerships, limited liability partnerships are not recognized as legal business structures in every state. Some states limit the creation of a limited liability partnership to professionals such as doctors or lawyers. Another disadvantage is that individual partners are not obligated to consult with other participants in certain business agreements. For the protection of the overall integrity of the company, you should create a partnership agreement that specifically outlines what each limited partner can and cannot do when making business decisions.

Conclusion

LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners. As with any legal entity, it is important that you check the laws in your nation (and your state) before getting too excited. In short, check with your lawyer first. The chances are good that he or she has firsthand experience with an LLP.