Creating an LLP agreement is one of the first things you should consider when setting up a limited liability partnership. Whilst you are under no legal obligation to have one, putting a written agreement in place is the best way to protect the interests of all members and the LLP itself, so it is strongly recommended that you do.
Below, we briefly explain the purpose of an LLP agreement, why it may be beneficial to your business, and the key issues you may wish to cover within this legally binding document.
The purpose of an LLP agreement
An LLP agreement is a private contract between all of the members (partners) of a limited liability partnership. The purpose of the agreement is to formally establish, clarify, and document the rules of the LLP, including the rights and obligations of members, how profits and losses are shared, and the way in which decisions are made.
Although optional, creating an LLP agreement is always advisable. Going into business with other people can have its benefits, but you’re unlikely to agree on everything all of the time (and sometimes circumstances change), so it’s best to be prepared and expect the unexpected.
Entering into a formal agreement is the best way to manage members’ expectations, minimise the potential for misunderstandings and conflict, and protect everyone’s interests. By doing so, you and your business partners can rest assured that your rights are protected by a mutually approved and legally enforceable contract – no matter what may happen in the future.
In the absence of an LLP agreement, your partnership will be subject to the following default provisions set out in the Limited Liability Partnerships Regulations 2001:
- All members are entitled to an equal share of the LLP’s capital and profit, irrespective of how much they invest in the business or the amount of work that they do
- The LLP must indemnify each member in respect of any payments they make and any personal liabilities they incur in relation to the LLP
- Every member may participate in the LLP’s management and enjoy equal voting rights on decisions
- No member is entitled to remuneration for acting in the business or management of the LLP
- The introduction of new members requires the consent of all existing members
- Any difference arising on ordinary LLP matters may be decided by a majority of the members, but any changes to the nature of the business require the consent of all members
- Every member has the right to access, inspect, and copy the LLP’s books and records
- No majority of the members have the power to expel any member without their express consent
Many limited liability partnerships find that these statutory provisions are not representative of the internal structure of the business, particularly LLPs in which some members invest or participate more than others.
For this reason, most limited liability partnerships create agreements with adapted provisions to more accurately reflect the particular needs of the business, and the varied rights and obligations of their members.
Every business is different, so it’s worthwhile taking the time to determine whether the statutory provisions are appropriate for your partnership, or whether you would be better served by an LLP agreement.
Once in place, it would override the relevant default provisions, provided that the terms you include are lawful and not unfairly prejudicial to any members.
What should be included in an LLP agreement?
Typically, an LLP agreement should cover the following key areas:
1. Key particulars
- Registered LLP name, and any trading name(s)
- Registered office address
- Nature of the business
- Particulars of every member – i.e. name, service address, home address, contact email and telephone number, occupation, and their role within the LLP
- Date of the agreement – this is the date on which all members sign it, or the date on which the last person adds their signature to the agreement
2. Rights, duties, and liability of LLP members
- Who the designated members are
- How much capital each member has contributed to the business
- Day-to-day management structure – e.g. are all partners equal, or is one or more a managing partner?
- Voting rights
- Duties of each member
- Profit-sharing and remuneration arrangements
- How running costs and business losses are shared
- Liability for business debts and obligations
- Holiday entitlement
- Sick leave and pay
- Benefits and expenses
- Capital rights upon the winding up of the LLP
3. LLP membership
- Membership eligibility – e.g. occupation, qualifications, skills, knowledge, capital contribution requirement
- Minimum and maximum membership numbers
- Procedure for admission of new members
- Resignation, retirement, and expulsion rules and procedures
- Entitlement and obligations of outgoing members
- Protocol for dealing with the death of an existing member
4. Decision making
- Rules and procedures on how decisions are made within the LLP
- Requirements for meetings of the members
- Which decisions can be made by individual partners, and which decisions are reserved matters that must be put to a vote or require the consent of managing partners
- The voting threshold for reserved matters – e.g. 75% of votes, or unanimous consent
- Is voting weighted – e.g. in accordance with each member’s investment or contribution, or will each member simply have one vote per decision?
- Whether members have a right to appoint a proxy
5. Dispute resolution processes
This section should set out how disputes between members should be dealt with – for example, resolving a deadlock situation through negotiation, mediation, or arbitration.
6. Other important matters
Other areas that you may wish to cover in an LLP agreement include:
- Rules on taking money out of the business
- How property of the LLP is to be owned and used
- Restrictive covenants – e.g. confidentiality and non-compete clauses
- Insolvency and winding up of the LLP
To ensure that your LLP agreement is legally valid and enforceable, you must follow the legal requirements for executing a deed or document.
A well-drafted LLP agreement serves as a solid, bespoke framework of rules for running your business. Providing clarity and certainty, it can minimise the risk of misunderstandings and unnecessary disputes, whilst also setting out clear procedures for dealing with any conflicts that may arise.
The default provisions are simply insufficient for most limited liability partnerships, so creating a suitable LLP agreement is a good idea.
Any such agreement will be private and confidential. You do not have to send it to Companies House for public disclosure or provide access to anyone other than the existing members.
When to create an LLP agreement
You can create an LLP agreement at any time during the life of the business, but you should ideally put one in place when you register an LLP at Companies House – and before you start trading. At this early juncture, you’re more likely to reach an agreement that meets the needs and expectations of all members.
Doing so will provide greater protection than the broad nature of the default provisions, ensuring that your business journey begins with clear rules on every aspect of the partnership, from profit-sharing arrangements to dispute resolution procedures.
An LLP agreement is a living document that will require updating throughout the lifecycle of the partnership, for example, when an existing member leaves or a new member joins the firm. Therefore, you should refer to it at regular intervals, and when any aspect of the business changes, ensure that it remains accurate and up to date.
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Like any type of business involving more than one person, establishing clearly defined rules from the start is paramount. This is the case whether you are setting up an LLP with family members, close friends, or a group of like-minded professionals.
Creating an LLP agreement as soon as possible after incorporation is the best way to ensure that all members are fully aware of their rights and obligations, including their required input and profit entitlement.
This will reduce the risk of misunderstandings and potentially costly disputes, which could be detrimental to not only the relationship between members, but also the success of your LLP.
If you need help setting up a limited liability partnership, or would like to know more about any of our products or services, please get in touch with our company formation team today.
Please note that the information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. While our aim is that the content is accurate and up to date, it should not be relied upon as a substitute for tailored advice from qualified professionals. We strongly recommend that you seek independent legal and tax advice specific to your circumstances before acting on any information contained in this article. We accept no responsibility or liability for any loss or damage that may result from your reliance on the information provided in this article. Use of the information contained in this article is entirely at your own risk.
