A new lease of life for LLPs
Henry Catchpole explains why there has been a surge in the number of LLPs in the UK this year. But are they for everybody?
The first half of 2016 saw a dramatic rise in the formation of limited liability partnerships (LLPs). Over 6,000 LLPs were incorporated in March and April alone – a 400% increase on the same period last year. That means there’s now over 62,000 LLPs on the Companies House register.
The first LLP was formed by Ernst & Young (OC300001) on 6 April 2001 following the introduction of the Limited Liability Partnerships Act 2000. The number of formations rose steadily to reach a high of just over 11,000 in 2011 but then dwindled until the current renewal of interest in LLPs.
An LLP is often the preferred legal structure for professional services firms – such as accountants, solicitors and medical practitioners – most of which previously operated as partnerships. In England and Wales, where 92% of all LLPs are registered, the key advantage over a traditional partnership is limited liability for participants. It's little surprise that take-up of LLPs is lower in Scotland, where the Scottish limited partnership caps individual liability of partners.
Investment companies and organisations set up to manage properties or land are also regularly incorporated as LLPs. However, in 2016, the massive growth in LLP formations has been driven by commercial businesses choosing to form as an LLP, apparently related to the government’s introduction of changes to the dividend tax rate for shareholders of limited companies.
Regardless of the tax position, it’s important to be comfortable that the features and requirements of an LLP are right for the business before you choose to form it.
Company secretarial requirements for LLPs
An LLP does not have shares, shareholders or directors. Instead, it has members who assume the dual responsibility of ownership and management of the business. At least two members are required, although it's possible for a single person to act alongside a corporate member.
At least two members must be identified as ‘designated members’, who take responsibility for ongoing compliance, statutory record-keeping and making submissions to Companies House. The requirements here are far more extensive than for partnerships, and similar to the regime for limited companies.
LLPs must file an annual confirmation statement and accounts with Companies House. Changes to the list of members and any changes to the member’s details, such as residential address, must all be filed with Companies House within 28 days of the date of change.
LLPs must also maintain the following statutory registers:
• Register of LLP members.
• Register of LLP members’ residential addresses.
• Register of people with significant control (PSCs).
• Register of mortgage and charges.
The new PSC legislation introduced in June 2016 covers LLPs but not partnerships. Typically, a person has significant control over an LLP if one or more of the following conditions are satisfied:
• Rights to more than 25% of the assets on a winding up.
• Holding more than 25% of the voting rights.
• Right to appoint or remove the majority of management.
• LLP agreements.
For LLPs, there’s no statutory equivalent to the articles of association required for private limited companies. While an LLP can be set up without a limited liability partnership agreement, it’s a very common and generally sound recommendation that a new LLP puts one in place. A well-drafted agreement can allow flexed profit shares based on members' individual contributions each year and differing rights to income and control between members.
Without an LLP agreement, an LLP will be governed by the default provisions set out in the Limited Liability Partnerships Act 2000 and Limited Liability Partnerships Regulations 2001. These provisions include:
• That all members are entitled to an equal share of capital and profit, even if they have invested different amounts in the business.
• That all members equally participate in management of the business of the LLP with equal voting rights.
• That unanimous consent is required for the introduction of new members.
• That there is no power to expel a member without his or her consent, for any reason.
As these provisions will often be unfair or overly restrictive, an LLP agreement may exclude or vary them.
Managing the business
A limited company is legally required to produce a whole host of resolutions and minutes to authorise and document decisions, but the members of an LLP are more free to choose how to manage the business. While that freedom may be attractive, it’s still important to consider and put in place an appropriate decision-making structure – so, despite the choice available, a high number of LLPs opt largely to replicate the regime that applies to limited companies!
• Henry Catchpole is CEO of company secretarial software provider Inform Direct. ICPA members receive free use for three months at www.informdirect.co.uk
This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.