Are you looking to set up a Limited Liability Partnership, or convert your business into one? If so, you’ll probably have some questions.
In her latest article, Corporate & Commercial Solicitor Zoe Watson answers some of the most common questions around LLPs and outlines the pros, cons and how to set one up.
What is a Limited Liability Partnership?
A traditional partnership is not a separate legal entity from its partners. This means that the partners involved are personally liable for any and all of the liabilities of the partnership, making it quite a high-risk way of conducting business.
A Limited Liability Partnership (LLP) is a body corporate which essentially protects its members from being personally liable for the LLP’s debts and obligations. It effectively limits their liability.
For example, if an LLP were in debt, the members would only be responsible up to the amount that they invested into the partnership. So, their personal finances and assets would remain untouched.
The majority of law applicable to LLPs is actually modified company law rather than partnership law. Unlike a general partnership, an LLP:
- is liable for its own debts;
- will contract in its own name with third parties; and
- can sue or be sued in its own right.
Who can set up an LLP?
There are very few requirements to set up an LLP, you can do so if your existing partnership:
- has a minimum of 2 partners; and
- is carrying on a business with a view to profit.
Who gets the profits from an LLP?
The members of the LLP have a right to receive the profits. How the profits are divided will vary from business to business, you may choose to share profits equally, based on performance or based on a fixed ratio.
Dividing profits on a fixed ratio means that the members agree on a specific percentage that each member will receive. This is usually based on each member’s contribution to the business, including their investment and percentage ownership.
An LLP agreement is incredibly important to specify not only how profits are divided but other fundamental matters governing the LLP.
What are the advantages of an LLP?
Aside from liability protection, LLPs offer more advantages for members:
- Profits pass through directly to partners
- The LLP itself doesn’t pay tax, instead individual partners will pay tax on their share of profits where eligible
- Members have flexibility and can decide share of profits between themselves
- Partners can leave and new partners can join without the business being disrupted
- The LLP is its own legal entity so it can enter into contracts, own property, employ staff and more
- An LLP’s name is protected in law, so other companies cannot register the same name
- An LLP doesn’t have to publish the distribution of profits
Related: Protecting Your Business with Trademarks: A Step-by-Step Guide
What are the cons of an LLP?
There are also some disadvantages to LLPs:
- Financial accounts have to be filed at Companies House
- Profits can’t be kept in the business and are taxed as they are received
- You can’t start an LLP as a sole member. If members leave or pass away, leaving just one member, the LLP can only continue trading for up to 6 months at which point the benefits of limited liability are lost.
Related: Can a director be personally liable for company debts?
Why choose an LLP over a limited company?
LLPs and limited companies are distinctly different.
LLPs offer limited liability to their partners linked to their investment while limited companies are separate entities with their own liabilities.
Related: What makes a strong business contract? Our advice
Can you turn a Ltd company into an LLP?
No, you cannot convert a limited company into an LLP.
The assets of the limited company would have to be transferred into the LLP using the appropriate instruments and the liabilities of the limited company discharged before dissolving the limited company.
What is an LLP agreement?
An LLP agreement is a legally binding agreement between the members and the LLP itself which governs the LLP.
Without an LLP agreement, a set of very narrow default regulations apply which will likely not be appropriate for your partnership.
What should be in an LLP agreement?
Without limiting other provisions which are often included in an LLP agreement, it should:
- name the designated and ordinary members
- outline each members’ contribution to the LLP
- map out how profits should be shared
- include provision for resolving any disputes
- set out how to retire from or dissolve the LLP
Related: The Importance of having a properly drafted partnership agreement
Can you set up an LLP by yourself?
Yes, it is possible to form an LLP by yourself by complying with the eligibility requirements as set out earlier in this article.
However, due to the complex nature of the legal documentation required, it’s often best to use a commercial lawyer to do this for you as they can ensure that the correct legal procedures are followed.
In addition, a solicitor can assist you in drafting an LLP agreement that best reflects the members’ wants and needs, and ensure it is properly drafted.
How much does it cost to set up an LLP UK?
To simply incorporate an LLP at Companies House, it costs £50 online or £71 for paper registration.
Legal fees vary depending on your specific set of circumstances. At Frettens, we’re always transparent with our fees and, after speaking to you, would be happy to provide a tailored estimate.
If you’re creating a business from scratch, rather than converting an existing company into an LLP, there will be more costs to consider such as employee salaries and renting or purchasing a commercial premise.
In my colleague Karen Edwards’ dedicated article, she outlines everything you need to know, including costs. You can read it here.
Solicitors for forming an LLP
At Frettens our bright Corporate & Commercial Team is one of the most experienced in the area and would be happy to assist you in setting up an LLP and/or putting together a partnership agreement.
If you have any questions following this article, or would like to discuss your circumstances with our team, please don’t hesitate to get in touch on 01202 499255 or by filling out the form at the top of this page.
We offer a free initial consultation for all new clients.
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