An LLP is a legal entity with a personality independent of its members. It consists of two or more persons associated, for carrying on a lawful business, with a view to making a profit. An LLP can enter contracts, incur liabilities and hold property. Unlike partnerships, the LLP itself is responsible for any debts and obligations that it incurs, not the individual members.
An ordinary partner in a partnership is governed by the Partnership Act 1890 and is directly at risk for all the debts and liabilities of its firm. A member of an LLP has no such direct liability as an LLP has its own legal personality and is responsible for its own liability. If it becomes insolvent, the loss incurred is borne by the creditors and not by the members. If its members are owed money by the LLP they even rank equally with that of outside creditors - ordinary partners do not. A member who has some undrawn profit, from past years in the current account, has as good a claim to be paid out of the assets of an insolvent LLP as the client whose money the LLP negligently lost.
Private Limited Company
An LLP offers the protection, from liability, of a company through limiting member liability to outsiders to the amount of fixed capital contributed and/or the assets of the LLP. If the LLP is unable to pay its debts from its own resources the liability of members is capped accordingly.
The protection given to the members of the LLP is generous. If a claim is made against the LLP, which is not met, the creditor will only be able to look at the assets of the LLP which should be slight as it is not in the interest of members to put assets into the LLP as these would be in jeopardy to creditors. Only in limited circumstances may a creditor be able to look behind the LLP structure and impose liability.
The LLP Incorporation Agreement
The most controversial issue in passing the Act involved whether to include default provisions in the absence of LLP members agreement. The Act and LLP Regulations 2001 provide only a basic default code for governance of an LLP.
Ultimately, the intention of Parliament was to leave it to the LPP to fully define the relationship, rights and obligations, with the members and between themselves via an incorporation agreement. It is therefore of the utmost importance that the incorporation agreement fully defines the relationship between the LLP and its members. Furthermore, the rights, responsibilities and obligations of the members themselves should be fully defined i.e. profit share, requisitioning of meetings, expulsion etc in order to minimalise the possibility of any future disagreement between members.
The LLP provides the protection of a private limited company and the informality of a partnership. However, this is at the expense of the entitys obligation to make public, through submission at Companies House, annual accounts and lists of members. Conversely, similar partnership information is not subjected to scrutiny in the public domain. Irrespective of the above, many regard the advantages to outweigh the disadvantages - which has ultimately resulted in persuading, and attracting, many multinationals to England and Wales.
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