Setting up a LLP

Since the Limited Liability Partnerships Act 2000 came into force, the creation of limited liability partnerships (LLPs) has offered traditional unincorporated partnerships a new way to organise their business structure with reduced personal responsibility for its debts.

Unlike regular partnerships and sole traders, the LLP itself, not the individual people involved, is responsible for any debts it accrues. Any two or more people who want to set up a profit-making business together can form a LLP. Companies and other LLPs can also be members of a LLP.

When first established, HM Revenue and Customs (HMRC) will need to be informed of the status of the business and an annual Partnership Tax Return and Statement will need to be completed by a ‘nominated member'. Although that person will have official responsibility for the return, all the members will be jointly liable for any penalties which result from it being submitted late or incorrectly.

Profits from the business are shared among the members of the LLP and, as individual members will be self-employed, they need to be registered with that status and will be responsible for paying their own income tax. However, unlike limited companies, the LLP does not have to pay Corporation Tax. Companies which are LLP members will have to pay Corporation Tax on their profits from the LLP.

Tax, VAT and PAYE for LLPs

As with other businesses, where applicable, the LLP will have to be registered for and administer VAT and PAYE.

With its administration being akin to running a company and more complicated than that of a sole trader or partnership, the advice of a corporate solicitor when the business is being set up will be invaluable in ensuring all legal requirements have been and continue to be met.

At least two members of a LLP have to be registered as ‘designated' members and have a number of legally-defined reporting responsibilities to Companies House. These include ensuring annual accounts and returns are properly signed and delivered and appointing auditors if necessary.

How members divide rights, responsibilities and profits from the business will be set out in a members agreement and it is advisable to consult an experienced corporate lawyer to draw up the agreement and ensure the interests of all individuals are protected.

Corporate solicitors and the members agreement

A members agreement is not obligatory but once it has been agreed and signed by the members it becomes a legally binding agreement on all the parties.

If an agreement is not drawn up, the LLP will be governed by the measures set out in the Limited Liability Partnerships Act 2000 and these measures are unlikely to cover all the aspects of how the members wish to run the business. For example, where an LLP operates without a members agreement, each member is automatically entitled to an equal share of the profits (and losses). This principle applies regardless of the LLP's individual situation.

A formal agreement allows the members to agree to split the profits in accordance with specific profit sharing arrangements and can therefore reflect circumstances such as part-time working, years of service or amount of investment. When a corporate solicitor is asked to prepare a members agreement, he will consult the members about their exact requirements and incorporate these as bespoke terms of agreement.

A formal members agreement would also cover many issues which arise in the life of an LLP such as retirement, death, holidays, admission of new members and expulsion. Other provisions are likely to include the amount of any capital contributed by each member to the business and the division of work and management responsibilities between the members.

Extensive corporate legal skills at JMW Solicitors

JMW specialises in providing advice on all aspects of LLPs and members agreements. The Corporate team at JMW is further able to draw upon the combined skills of the firm's partners in other fields such as Employment Law, Intellectual Property Law and Commercial Property Law in order to provide any of the parties to a limited liability partnership with a broad range of comprehensive, commercially practical, added-value legal advice.

For further information please contact us on 0845 872 6666 or use our enquiry form - we will respond promptly.