Thinking about an LLP?

Limited Liability Partnerships are becoming ever more commonplace so now might be a good time to look at possible pitfalls that may arise unless the LLP is founded upon an agreed basis in writing. There is no legal requirement to have a written agreement in place in a Limited Liability Partnership, as the default provisions of the 2001 LLP Regulations will apply in the absence of one, but there can be dangerous ramifications if the partners just rely on these. Here are some of the potential problems if you don’t have a written agreement in place.

Under the regulations, every partner is entitled to participate in the management of the LLP’s business as an equal, regardless of their experience or financial input into the partnership, this could lead to resentment and poor management, and so it’s probably best to create some form of decision making tree and division of responsibilities from the outset. Similarly, all partners will be entitled to an equal share in the capital and profits of the partnership regardless of how much they initially contributed, unless there’s a written agreement in place to the contrary.

General decision making regarding normal business matters are decided by a simple majority under the default provisions and changing the nature of the business would require a unanimous consent, this might lead to a level of inflexibility in a changing market so is also probably best addressed in a written agreement.

Remuneration is another possible source of contention as under the default provisions, partners have no automatic entitlement to be remunerated for their work in the LLP other than by way of profit share. This would need to be looked at in cases where some partners work in the business full time and would need paying on a regular basis.

Other contentious issues will LLPs relying on the default provisions of the 2001 regulations include the introduction of new partners into the LLP, expulsion of existing members; under the regulations, a partner can’t be expelled by a majority of the other partners unless the power to do so has been conferred by an express written agreement setting out the circumstances allowing such an expulsion; for example, if they are in material breach of the agreement, or have taken too prolonged an absence from the company.

So if you are thinking of setting up a Limited Liability Partnership, why not give us a call?

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Filed under Commercial law, Company Law, contract law, Dispute resolution, UK Law

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