Limited
Liability Partnerships
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When considering whether to enter into a separate LLP agreement, the following need to be taken into account.
Members' rights and responsibilities under the "default" rules
Unless there is a
members’ agreement which makes other provisions the “default”
rules apply.
These include the following:
- All members share
equally in the capital and profits of the LLP.
- Every member may
participate in the management of the LLP.
- No member can receive
remuneration for acting in the LLP’s business or dealing with
its management.
- Members cannot
voluntarily assign their interests nor can new members join unless all
the current members give their consent.
- Members must account
to the LLP for profits gained in similar or competing businesses or
from transactions concerning the LLP or from the use of its property,
name or business connections (unless the LLP consented to the arrangement
in question).
- Every member will
be entitled to access, inspect and have copies of the LLP’s books.
- Every member must
provide true accounts and full information about matters affecting the
LLP to any other member.
- The LLP must provide
indemnities to members for payments and personal liabilities in certain
circumstances.
These rules, by themselves,
are unlikely to be a suitable basis on which to operate a business. In
some respects they are too rigid, thus reducing the flexibility which
is one of the key attractions of the LLP.
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What
else should be considered?
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Other points which
will automatically be applied by the legislation to any LLP without an
agreement (or with an inadequate agreement) are also potentially of concern.
For instance:
- A member can leave
the LLP by giving “reasonable notice” to the other members.
The legislation does not define what period of notice is “reasonable”
nor give any guidance on the form of notice or how it is to be given.
- Any member will
have the right to bring legal action alleging that conduct of the LLP's
affairs is unfairly prejudicial to one or more members (including himself)
under the rules in section 459 of the Companies Act 1985.
- All members will
be “designated members” with responsibility that for filing
requirements (e.g. filing of statutory forms, notifying changes to the
members or name or registered office, filing of the annual accounts
and annual return). The law imposes penalties on designated members
of defaulting LLPs, usually criminal fines.
As well as the adjustment
of the “default” rules, the members may wish the following
matters to be reviewed:
- The rules and procedures
governing both voluntary and compulsory cessation of membership and
expulsion of members.
- Entitlements and
obligations of outgoing members (including annuities, continuing liabilities,
responsibilities for professional indemnity claims, indemnities in general).
- Procedures for
future variations of the agreement (vital to facilitate changes in response
to changes of business circumstances and developments in law and practice).
- The liability level
of members (if any).
- Limitations on
members’ authority including their ability to bind the LLP.
- Specific duties
and obligations of members (for instance a duty of good faith, requirements
to provide financial information to one another and to the LLP itself,
an obligation to devote full time and attention to the LLP’s business
and its affairs, confidentiality and non-competition clauses).
- Procedures for
approval of the annual accounts.
Return
to LLP Agreements
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