What Is The Importance Of An LLP Agreement

An LLP agreement is an important contract, since without such a document the Limited Liability Partnership Act 2000 (Act) and other legislation will impose certain rights and obligations on the members of an LLP. Holding a written agreement provides members with the opportunity to alter or exclude the default position imposed by law. It can also ensure an agreement in other areas. Many costly disputes have been settled and problems side-stepped as a direct result of entering into an LLP agreement.

A limited liability partnership is a fairly recent form of entity available since the Act. It has a separate legal personality and is different from a general partnership or a limited partnership. Its members’ liability is restricted to the sum they have agreed to contribute to the LLP, but it also has some of a general partnership’s flexibility.

A limited liability partnership (LLP) agreement is a contract between the members of an LLP to ensure that there will be a fair relationship between them and to protect their joint investment. An LLP agreement is permitted to remain private, unlike a company’s Articles of Association.

New members

Unless the LLP agreement says otherwise, the admission of an additional member needs the unanimous consent of the existing members. A simple or higher majority may be considered more suitable. Members who invest more into the LLP may want a bigger say in the appointment of new members.

Management

Each member has the right to be involved in the management of the LLP business, unless the LLP agreement says otherwise. This default position may not always be suitable – particularly in cases where some members have invested significantly more than others, or where particular members want to have more management control.

Profits and Finance

The default entitlement is that all members can receive an equal share of the LLP’s profits. Members frequently want to alter this situation; individual members may want a larger or smaller share of profits, or other treatments for capital or income profits. One reason might be because they have invested more money or time in the LLP. The LLP agreement should record each member’s proposed investment, and the member’s entitlement to drawings (if any) as an advance of their profit share.

Member Decisions

Unless the LLP agreement states otherwise:

-‘ordinary’ LLP business decisions are established by a majority of members

– particular ‘fundamental’ decisions that affect the LLP and its membership will require unanimity. An example might be the admission of a new member, or a proposed change in the nature of the LLP’s business.

The requirement for unanimous agreement may be seen as unnecessarily restrictive. In these cases, LLP agreements often allow for a special majority instead – for example, 75% of members, instead of unanimity. However, there may equally be decisions that can ordinarily be made by only one member or a simple majority of members, but which the members think are so fundamental to their business that they require a special majority or unanimous decision – perhaps entering into high value and/or long term contracts.

Exiting the LLP

A person may cease to be a member of an LLP on a number of conditions: death, or dissolution if it is a corporate member; agreement of the other members; or giving notice of an agreed period to the other members.

A member can be expelled from membership only if the LLP agreement specifically provides for this. Reasons for expulsion might include:

– a member breaching the LLP agreement;
– a member ceasing to hold a relevant qualification;
– a member neglecting to perform his or her duties; or
– a member failing to pay money that is owed to the LLP.

The LLP agreement should also deal with the repayment of capital (or otherwise) in the event death, retirement or expulsion of one of the members, along with a mechanism for calculating the value of the relevant member’s share.

Non-Compete

Members are likely to be highly familiar with the LLP’s business, including its customers and suppliers. An LLP agreement should protect the LLP’s business by including any necessary non-compete terms. Members can decide that a member will not be allowed to set up a competing business, or work for another such business, for a reasonable period after he or she leaves. This restriction should apply to a defined business area.

In the interests of protecting the LLP’s business, LLP agreements frequently also have terms to stop members (while they remain members of the LLP and for a reasonable period after they leave) from:

– poaching any employees of the LLP;
– poaching any of the LLP’s customers; and
– interfering with the LLP’s suppliers (e.g. contriving that a supplier no longer supplies goods or services to the LLP).

Conclusion

How important an LLP agreement is to you will depend on your understanding of whether the provisions that the law imposes by default on the members and the LLP are flexible enough for your business needs, or whether an LLP agreement would be of benefit to avoid their application, and additionally to cover further important areas on which the general law is silent.

Jamie Hunt, Legal Clarity Limited The information provided in this article is meant as a general guide only. It is not intended to be exhaustive or tailored to your individual circumstances. For more information on LLP Agreements, Google ‘Legal Clarity’.

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