Roles & Responsibilities in a Business: Part 2 – Limited Liability Partners

Partnerships exist when two or more members work together with a view to make profit (i.e. in a business venture) and can exist without any formal documentation or registration.

However, in a general Partnership such as this, the Partnership is not a separate legal entity, meaning that the Partners themselves are the Partnership. Therefore, Partners open themselves up to the risk of being personally pursued for any liabilities, debts or financial obligations of the Partnership.

In order to avoid this personal liability, individuals may elect to instead form a Limited Liability Partnership (LLP). This Article explores LLP’s and the roles and responsibilities of Limited Liability Partners (Members).

This article is part two of a three-part series. To read part one that covers the Roles of Shareholders please click here.

LLPs were created and are governed under the Limited Liability Partnerships Act 2000. LLPs have elements of both a company and a partnership in that they are treated as a separate legal entity from its Members but are also treated as tax transparent (i.e. the Members are taxed, rather than the LLP).

LLPs must also be registered with Companies House. Consequently, LLPs have the flexibility of a general Partnership with the added advantage of limited liability for its Members. This means that LLPs are liable for their own debts and financial obligations and are able to contract with third parties in their own right. LLPs can be a good option if you want the benefits of a general partnership but want to protect your personal assets.

LLP’s must have 2 or more Members. At least 2 of them must be ‘designated Members’ at all times. Members may be individuals or companies, which allows for flexibility and a diverse range of participants and skill sets.

Depending on the type of Member, Members in an LLP may participate in the management and control of the business and are entitled to a share of the profits earned by the business. ‘Designated Members’ have more responsibilities in the LLP than ordinary Members, similar to those of company Directors, including ensuring that the LLP meets all its legal obligations, keeping company accounts and notifying Companies House of any changes. Designated Members may therefore be legally liable if they fail to fulfil these statutory responsibilities. It is common for different Members to have different roles, and this may be agreed in an LLP or Members’ Agreement.

Any Agreement will also state how the LLP is to be governed, how decisions are to be made, how Members are to be remunerated and will outline any management structure. This will help Members to avoid and navigate any disputes later on and will ensure that each Member is clear of their role in the LLP.

Unlike Companies, LLPs do not require a memorandum or articles of association and therefore their governance is often decided via an LLP or Members Agreement. In the absence of any LLP or Members Agreement, however, the Limited Liability Partnership Regulations 2001 contain eleven default provisions that regulate the Members’ relationships. These include:

• Members share equally in capital and profits.
• Every member may take part in management.
• No member is entitled to receive pay for managing the LLP.
• No person can become a member or assign their membership without the consent of all existing members.
• Ordinary decision making may be by the majority of the members. Any proposed change to the nature of the business requires the unanimous consent of all members.
• If a member (without consent) carries on any business of the same nature as, and competing with, the LLP then they must account for and pay over to the LLP all profits made by them in the business.
• Every member has a duty to account for benefits derived from transactions with the LLP and its business or property.

Of course, Members may not wish for their roles or the LLP itself to be governed in this way, particularly if different Members have contributed different levels of equity, and therefore it is advised that an LLP or Membership Agreement is entered into at the outset. Similar to a Shareholders Agreement, LLP or Membership Agreements are private between the parties, and therefore do not need to be filed at Companies House.

In many LLPs, the Members are equal in terms of risk, capital contribution and profit distribution. However, some LLPs elect to have different types of Members.

Equity Partners

Equity Partners are usually the founding Members of the LLP. They often contribute a larger amount of capital to the business and have full voting rights on business decisions. In exchange, equity partners often receive a percentage of the LLP’s profits, which is usually taken monthly, with a top-up distribution at the end of the financial year.

This means that the amount of pay received is not guaranteed and, if the LLP’s profits are less than anticipated at the end of the year, they may be liable to repay some of the earlier profits received back to the business.

Fixed-share Partners

Fixed-share Partners are usually less senior and contribute a smaller sum of capital to the LLP. They generally have less responsibility and may work fewer hours. Fixed-share partners are given a nominal percentage of equity, such as 0.5% in the firm and are paid an agreed monthly sum. This may be topped up at the end of the financial year, relative to their equity share. Again, if the LLP’s profits are less than anticipated at the end of the year, they may be liable to repay some of the earlier profits received back to the business.

Salaried Partners

Salaried Partners are usually employees of the LLP and therefore work under a contract of employment. They receive a salary regardless of how much profit the LLP makes. They do not contribute any capital to the business and do not usually have a say in how the business is run.

Deciding how your LLP is to be run, including the various roles and responsibilities of Members can be complicated, and it is important to seek legal advice.

An LLP or Membership Agreement will enable you and the other Members to govern decision making, including deciding how any disputes will be resolved in advance. Our Corporate and Commercial Team can assist you in the process whether that is drafting or reviewing the LLP or Members Agreements for your partnership or answering any questions you may have. Contact us today and book your free 30-minute consultation.

This article is for informational purposes only and does not constitute legal advice. Individuals should not act upon the information contained in this article without first seeking professional legal and financial (tax) advice.

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