Limited Liability Partnerships (LLPs) need to put in place a written agreement between their members. This is because when you form an LLP, there is no written constitution as would be the case with a limited company. In the absence of a written LLP agreement, the LLP will be regulated by the Default Provisions of the Limited Liability Partnerships Regulations 2001. This can produce some damaging consequences for your business.
Here are 5 good reasons why you should have a written LLP agreement for your business:-
1. Expulsion of Members
A majority of the members cannot expel another member without express agreement having been reached. Most LLPs need the power to give notice to a member in certain circumstances. For example the member suffers long term illness or commits a serious breach of their obligations towards the LLP or the other members. However, in the absence of an express agreement, the only remedy in case of a dispute would be to bring the LLP to an end and wind up its affairs.
2. 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 without having in place a written LLP Agreement.
3. No entitlement to Members’ Remuneration
Without an express agreement, members would only be entitled to take their 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.
4. Liability of Members
One common reason for wanting limited liability is to keep the members indemnified against the liabilities which the LLP incurs in the conduct of its business. Yet 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.
5. Participation in Management
Every member is entitled to participate equally in the management of the business in practice. However, members will usually have different decision making roles and powers which would usually be set out in the written LLP Agreement.