The initials “LLP” are increasingly found at the end of business names, including our own – Stephens Scown LLP. LLP stand for Limited Liability Partnership which are a hybrid legal entity somewhere between a limited liability company and a traditional partnership. A LLP is a separate legal entity which provides limited liability for the members in respect of some of the liabilities of the business, like a limited liability company.
The majority of LLPs are created when existing partnerships convert to LLPs to obtain the benefits that limited liability offer, whilst others are created when two or more individuals start a new business.
In the case of both partnerships and LLPs there are basic rules that deal with issues such as how the profits are divided and what happens to a partner’s share when they die in the absence of any agreement between the partners or members of the LLP to the contrary. However in the case of partnerships it has long been recognised that the default rules are far from satisfactory and normally do not reflect what the partners would want to occur if for example there was a dispute between them or on the death of an individual partner. These rules are normally modified to fit the particular business in a partnership agreement set out in a formal deed signed by all the partners.
When converting a traditional partnership into an LLP or when a new LLP is created it is easy to overlook the need for an agreement between the members of the LLP to cover the issues that would have been set out in a partnership agreement.
In the absence of a formal members’ agreement the Limited Liability Regulations 2001 (the Regulations) govern the running of an LLP. This means all members are treated as equal members with equal voting rights, equal rights to run the business and equal rights to a share of the profits. This may not reflect what was intended.
Death of an LLP Member
The lack of a members’ agreement is a particular concern when a member dies. Under statute and the Regulations there are no clear provisions dealing with how a deceased’s share of an LLP should be treated. The Regulations and statute prohibit the deceased member’s personal representatives (executors) from being able to:
• Participate in the management of the business. Hence neither they nor the beneficiaries of the deceased have any right to be appointed as a member of the LLP in the place of the deceased. They can only be appointed as a new member of the LLP with the consent of all of the remaining members. This can make it difficult for the personal representatives to deal with the share that belongs to the deceased’s estate.
• Demand the transfer or repayment of the deceased’s share of the value of the LLP to the estate until the other members are ready to account for it.
The personal representatives have an equitable right not to be treated unfairly, from a financial perspective, compared with the remaining members of the LLP. However, how would the personal representatives know if they are being disadvantaged if they are prohibited from any involvement in the business?
These and other issues relating to the day to day management of a LLP can be addressed in a members’ agreement. The preparation of the agreement can also help the member agree and plan for how the purchase of deceased member’s share can be funded which again is often overlooked. Where a members’ agreement and appropriately drafted Wills for the members are in place it can save unnecessary delay, expense and anxiety for the beneficiaries of the estate of a member of a LLP who dies, and help to avoid cash flow problems for the LLP.
Sarah Mansbridge is a member of the firm’s Private Client team based in our Exeter office 01392 210700 or private.client.exeter@stephens-scown.co.uk. Sarah and her colleagues in the Private Client teams based in Exeter, St Austell and Truro can provide individual advice on these issues.