There are many practical benefits of converting a partnership to a LLP and incorporation of LLPs on is on the rise, in particular amongst professional service providers. Of course, conversion will result in some cultural and administrative changes, but the benefits are often likely to outweigh the changes – and change can be a good thing in itself.
We have advised and assisted clients to convert their existing partnership to a LLP, guiding them through the various issues that arise, helping them to be prepared for the various matters that will require their attention, such as:
Appreciating the difference
In a LLP every member is an agent of the LLP. As such each member has authority and status broadly similar to that of a director of a company. A LLP is bound by anything done by a member on its behalf, unless the member in fact had no authority to act on behalf of the LLP, and the person with whom the member is dealing knows that.
Each member will only have liability for the debts of the LLP up to the amount they have contributed to the LLP. However, the Limited Liability Partnership Act 2000 (LLPA) does provide for members of the LLP to contribute to the LLP's assets on its winding up to the extent that they have agreed to do so in any LLP Agreement and anyone lending money to the LLP, such as a bank, may still require personal guarantees from the members, as they frequently do with shareholders in a company.
When dealing with third parties the general position is that members of a LLP will not personally be jointly liable for contracts entered into by the LLP or personally jointly and severally liable with the other members for any torts (negligence etc.) by the LLP. As with directors of companies, however, members of a LLP may be personally liable for their own negligence if they have assumed a personal duty of care and have acted in breach of that duty. Exposure to such liabilities can be managed, and the risk and extent limited, and we can advise on such measures.
LLP Agreement – can we utilise our partnership agreement?
As with an ordinary partnership, the members of a LLP are not legally obliged to enter into any formal LLP agreement regulating the relationship between them. There is clearly an advantage in having a LLP agreement so that the rights and duties of the members as between themselves and as between the members and the LLP are expressly set down and reflect the agreed position. In particular incorporation of a LLP creates legal obligations under the LLPA and the members need to agree how these obligations are to be shared.
In the absence of specific agreement, Regulations provide a set of default provisions, which members, in the same way as with partnerships, will usually want to displace or elaborate in a LLP agreement. It is usually possible to adapt an existing up to date partnership agreement into a LLP agreement. However if your agreement is out of date then you are probably better off replacing it with a new LLP agreement.
Can we still have salaried members?
Yes! Members of a LLP are not regarded as employees unless they would have been employees if the LLP had been a partnership i.e. if they would have been salaried partners.
Administrative matters
Certain provisions of the Companies Act 2006 are applied to LLPs and we can advise you on the necessary requirements. A LLP is required to have at least two Designated Members, who are responsible for ensuring administrative obligations are dealt with. For example, a LLP must file an annual return and keep a register of LLP members' residential addresses for LLP members who are individuals and the LLP's register of members must record a service address, which can be the LLP's registered office. See our "Guide to changes to LLP law" for more details.
Conversion will require contracts with third parties to be transferred to the new LLP and consent from a third party may be required – such as the transfer of a lease. We can advise you on the best way of approaching such issues and negotiate with third parties on your behalf if necessary.
Choice of the LLP name is be governed by regulations and the considerations are similar to when choosing a limited company name. All stationery will need to be updated and certain information will have to be included, which we can guide you on.
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.
