Joining or leaving a Limited Liability Partnership (LLP)? Key Issues to Consider

Limited liability partnerships (LLP)  are now a well-established and popular form of business having been established under the limited liability partnerships act 2000.

They are extremely popular and are the preferred choice for many professional businesses due to their unique properties allowing business owners to enjoy the flexibility of partnership alongside the protection of limited liability.

It is, however, important to bear in mind that when making the decision to join an LLP as a member or when deciding to exit an LLP as a member there are numerous factors, which should be considered in order to protect your position.

Key things to consider when joining an LLP

It is extremely important before joining an LLP as a member to ensure not only that:

• there is an LLP membership agreement in place;
• but also, that any such agreement contains suitable and appropriate provisions to protect your investment and to ensure that you are not exposed to unanticipated liabilities.

Whilst it is not a requirement to have an LLP agreement in place, in the absence of such an agreement members are left to rely upon the provisions of the Limited Liability Partnership Act 2000 (The LLP Act).

Whilst the LLP Act does set out rules between members, these are extremely basic and will often result in consequences that members will not find satisfactory. By way of example, the default position under the LLP Act is that each member has equal shares in the capital and profits. This is extremely unlikely to be the desired position for most LLPs.

Assuming that there is an LLP agreement in place, it is also important to ensure that the specific provisions of that agreement are suitable for your requirements. The following are key areas to look at: 

1. There should be a clear statement of the respective shares that each member has in both the capital and profits.
   
   
2. Just as importantly, you need to ensure what the position is in relation to any losses.
   
   
3. What about designated members - this should highlight those members that have specific management responsibilities and powers.
   
   
4. Also, check the position in relation to new members being brought into the LLP.
   
   
5. Even at the stage of entering the LLP as a member it is important to also consider what provisions are in place in relation to exit. A properly drafted agreement will contain specific provisions in relation to such things as exit via retirement, expulsion by the other members and voluntary resignation.
   
6. The agreement should also cover financial entitlements upon departure, including provisions for dealing with members' capital investments, personal guarantees given by members to support borrowing by the LLP, and details of any restrictive covenants that members may be subject to following departure, for example, non-compete clauses.
   
   
7. What arrangements are in place in relation to a potential sale of the business? For example, can the majority of members force a sale of the business?
   
   

Key things to consider when exiting an LLP

When joining an LLP exiting tends to be the last thing on a prospective member’s mind. However, leaving consideration of these matters until the point of exit is not sensible from anyone’s perspective as it simply increases the likelihood of expensive, acrimonious disputes.

When considering exiting an LLP as a member it is extremely important to understand your legal rights. Again, the LLP membership agreement is likely to be the key document to consider. If, however, you are in the unfortunate position of having to rely upon the provisions set out in the LLP Act then the position is far from straightforward.

In this scenario, the only way to exit the LLP other than death is by giving "reasonable notice" or by securing the agreement of all the other members.

The LLP Act does not define what reasonable notice is and consequently, this will be very much fact-specific and depend upon the nature of the business.

The other main disadvantage of simply relying upon the LLP Act is that the act does not provide any indication as to a departing member's entitlement or indeed provide any structure for the release of a departing member's ownership stake. This is far from ideal and can lead to lengthy and expensive disputes between members. Consequently, you LLP membership agreement must contain provisions dealing with the following:

1. What will the position be in relation to your earnings up until the point of departure?
   
   
2. Will you have to contribute to any losses of the partnership before you leave?
   
   
3. If there is an outstanding balance that you owe to the LLP upon exit, how will that be dealt with?
   
   
4. What mechanism is in place for dealing with your capital account? In other words, how can you realise your investment in the business upon departure? For example, are you entitled to a lump sum payout or will your entitlement be paid out in tranches over a period of time? Will your share be transferred to another member or divided equally between existing members?
   
   
5. How do you get released from any personal guarantees that you may have entered into for the benefit of the LLP?
   
   
6. Will you be affected by any restrictive covenants and is it possible to negotiate a release from any restrictions as part of an exit deal?
   
   
7. What happens to any assets that you may have brought into the business (including property and intellectual property) upon exit? Is there an agreement set out as to how any such assets will be extracted or, alternatively, will you receive ongoing payments from the LLP in relation to any such assets?
   
   
8. What are the expulsion arrangements in relation to any particular member?

Due to the complexities around LLPs, as outlined, it is important to get early, bespoke specialist advice before making any decisions around either joining or leaving an LLP as failing to consider all relevant factors bn have very expensive consequences.

For a free confidential call with us get in touch and book your call now: enquiries@bridgeehr.co.uk