While there is no statutory requirement to put in place a written agreement, an LLP without one will be governed by the default provisions in the Limited Liability Partnerships Regulations 2001. It is unlikely that these default provisions will be satisfactory and, in some cases, may produce some damaging consequences for your business.
The following are situations where the default provisions are unlikely to be appropriate:
1. Capital and profits
All members will be entitled under the default provisions to share equally in the capital and profits of the LLP. This is the case even where members have contributed differing sums to the LLP. If the members do not intend to share capital or profits equally where, for example, they have contributed different amounts, this should be reflected in a written LLP agreement.
2. Participation in management
Every member is entitled to participate equally in the management of the LLP's business. Many LLP's will want to distinguish between members in terms of their decision-making duties; particularly to give more senior individuals or individuals who have made a bigger financial contribution greater influence.
3. Decision-making by the members
The default provisions state that ordinary matters connected with the business are decided by a majority of the members, except a change in the nature of the business which requires unanimous consent. It may be appropriate to change this default position so that the more important decisions require the consent of 75% or all of the members.
4. No entitlement to members' remuneration
Under the default provisions members are not entitled to remuneration. Their only means of taking a return is by way of profit share. It may be appropriate for some of the members to be paid and, if so, this would need to be set out in the written agreement.
5. Introduction of members or assignment of interest
No person may be introduced as a member or voluntarily assign an interest in the LLP without the consent of all members. More flexibility may be required by a reduction of these restrictions in the LLP agreement.
6. Expulsion of members
A member cannot be expelled from the LLP by a majority of the members unless a power to do so has been conferred by express agreement. It is usually appropriate to set out when a member will be expelled. For example, in the event of his bankruptcy, if in material breach of the agreement or if he is absent for too long from the management of the LLP.
7. Access to books and records
All members will have access to the books unless the written agreement specifies otherwise. An LLP may wish to restrict this right to its more senior members.
How Jordans can help.
Jordans can assist by forming a LLP on your behalf and helping put in place an appropriate written agreement, or preparing a written agreement for a LLP that has already been registered.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
