Summary and implications

The Limited Liability Partnerships Act 2000 (the "Act") introduced a new entity called the English Limited Liability Partnership (the "LLP") in April 2009 which has rapidly become the vehicle of choice for the UK based managers of alternative funds. This is because an LLP combines the flexibility of a partnership with separate legal personality and a favourable UK tax treatment.

What is an LLP?

An LLP is a hybrid form of business entity.

  • It combines certain characteristics of a company (e.g. limited liability and the status of a body corporate) with those of a partnership (e.g. organisational flexibility, privacy and tax transparency).
  • LLPs are often used as joint venture vehicles, as the management vehicle for UK managers of private equity funds (and hedge funds), and increasingly as the most common structure for UK professional services firms.
  • An LLP is a body corporate and as such has legal personality separate from that of its members (unlike an English general or limited partnership). An LLP has members rather than shareholders, directors or partners and the Act provides that each member of an LLP has power to bind the LLP.

Advantages of an LLP

An LLP has a number of advantages, including tax transparency, the status of a body corporate and the ability of members to take part in management of the business of the LLP. The requirement for an LLP to file annual accounts at Companies House may, however, be unattractive.

Limited liability for each of its members

In the ordinary course of business, the liability of a member of an LLP is limited to its contribution to the LLP. This contrasts with a general partnership, where each partner has unlimited liability for the debts and obligations of the partnership. This is the main reason for LLPs being popular amongst accountancy and legal firms which have previously traded as English general partnerships.

However, a member of an LLP may be liable in negligence to a third party if that member has assumed a duty of care towards that third party and it has breached that duty of care. It is not clear from case law whether this responsibility is dependent on conduct or is assumed. The uncertainty is unsatisfactory as it is not clear how members can avoid personal liability. Although liability for members is limited, circumstances may exist where this is not the case Members may seek to state in an LLP's standard terms and conditions that members do not accept personal liability. The Unfair Contract Terms Act 1977 applies so that this type of clause must be broadly reasonable and cannot exclude liability for death or personal injury resulting from negligence.

Body corporate

An LLP is a body corporate and as such has legal personality separate from that of its members. An LLP can enter into transactions and contracts in its own name, hold assets in its own name, and acquire rights and assume obligations in its own name. The assets and liabilities of the LLP are separate from those of its members.

Tax transparency

An LLP is transparent for UK tax purposes and is treated in the same way as an English general partnership despite the fact that it is a separate legal entity. Its members are liable for tax on their share of the income and capital gains of the LLP.

Organisational flexibility

The powers of an LLP are unlimited by law. The members of an LLP usually enter into a members' agreement to record the business of the LLP and the powers, rights and obligations of each of the members. There is no requirement to file an LLP's members' agreement at Companies House. In the absence of an agreement the default provisions in the Act apply to govern the relationship between the members of an LLP.

Accounting and filing requirements

The accounting and filing requirements of an LLP are broadly similar to those which apply to a UK company e.g. a filing must be made at Companies House on the admission or retirement of members and annual accounts must also be filed.

Are there any specific requirements on members?

There is no maximum number of members of an LLP. The default position is that all members must agree to the admission of a new member, although this can be varied by agreement between the members of an LLP.

There is a legal requirement to have at least two "designated members" of an LLP at any time. The designated members have certain legal obligations, mainly of an administrative nature, such as ensuring accounts and appropriate information in respect of the LLP are filed at Companies House. Designated members do not automatically have any additional management rights or powers.

An LLP will not automatically cease to exist if its membership falls to below two, but Companies House may consider striking off the LLP if it ceases to operate. After six months of having a sole member, the limited liability status is lost and the sole remaining member will have joint and several liability for any debts incurred by the LLP after the six month period.

Establishing an LLP

An LLP may be established by filing form LLIN01 at Companies House and paying a nominal registration fee. It is not possible to choose the same name as any other LLP, company or English limited partnership.

Ongoing obligations

An LLP must maintain a register of members which contains details of the name, address and (for individuals) date of birth of each member and notify Companies House of the address at which the register is kept. The register must be open to members without charge and to other persons for a fee. The residential addresses of members can be protected – individual members may instead give a service address.

An LLP must paint or affix its name outside every office or place of business in a conspicuous position and in legible letters. The LLP's name must also appear on all business correspondence, notices and websites. Failure to comply can result in a fine for the LLP. A member may also be subject to personal liability for failure to comply.

Insolvency

The UK insolvency regime applies to LLP's in much the same way as it does to UK companies. This includes potential clawback of any distributions which an LLP made when it knew, or should reasonably to have known, of its impending insolvency.

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