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Friday, 12 October 2012

Friday Guest Blog: How Limited Liability Partnerships Work


By Sonio Singh, Partner in the Corporate Department at Davis Blank Furniss

Limited Liability Partnerships were introduced in England and Wales in 2001 as a means of combining the flexibility of partnerships together with the protection of limited liability for their members. Although LLPs are still not used as widely as a corporate vehicle, they are particularly useful for professional partnerships including firms of solicitors.

The primary features of an LLP are that it is a body corporate (albeit taxed as a partnership) and therefore a separate legal entity to its members. Accordingly, the members of an LLP have limited liability in that in most circumstances they do not need to meet the LLP’s liabilities. However, an LLP has the management flexibility of a partnership and the members can freely agree profit share, decision making as well as appointment and retirement issues.

The Limited Liability Partnership Regulations 2001 contain provisions relevant to the assignment of an interest in an LLP, subject to the consent of the other remaining LLP members. The transfer of shares in an LLP also appears to be permitted by Section 7 of the Limited Liability Partnership Act 2000. However, there does appear to be an absence of a statutory definition regarding the “share” of an LLP.

Whilst an LLP Agreement will detail the members’ financial and corporate rights and duties - such as rights to profit/capital and an obligation to contribute capital/attendance and voting rights - there is little certainty regarding this issue. However a “share” in an LLP would appear to encompass these rights and duties.

Although the law is not definitive in this area, if an LLP member is seeking to transfer all their financial & corporate governance rights and duties, the usual course will be for an incoming member (“transferee”) to be admitted at the same time as the transferor leaves the LLP – in accordance with the LLP Agreement. The retiring member would then receive a repayment of their capital contribution together with their share of any profits simultaneously to the new member making a contribution to capital.

Whilst the statutory regulations state that the consent of all the members of the LLP is required for the admission of the incoming member, a comprehensive LLP Agreement will usually contain clear provisions on the exit of a member from the LLP, their financial rights and other restrictions. There is also a duty to notify the Registrar of Companies regarding the change in the LLP membership.

A more unusual scenario is where an LLP member is seeking to assign their share in the LLP to someone who will not necessarily become a member. The usual course is for the assignor to continue as a member of the LLP and to exercise voting rights etc in accordance with the directions of the assignee acquiring the share.

This is not necessarily a clean solution and the assignor will have concerns that they continue to have contractual obligations pursuant to the LLP Agreement and statutory obligations without reward. The solution may therefore be to obtain the consent of the members to the assignment of not only the financial interests in the LLP but also the managerial interest.

Limited Liability Partnerships continue to remain a specialist area and detailed advice is required if an LLP vehicle is appropriate for tax or legal purposes. A robust and detailed LLP Agreement is – of course - essential in these cases.





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