Why An LLP Agreement Is Important

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An LLP agreement is an important document because without one the Limited Liability Partnership Act 2000 (Act) and other legislation will mean that certain rights and obligations apply to the members of an LLP. Having a written agreement provides members with the opportunity to vary or exclude the default position imposed by law, and to ensure an agreement in other areas. Many expensive disputes have been resolved and other problems avoided as a direct result of entering into an LLP agreement.

A limited liability partnership is a comparatively new form of entity available since the Act. It has a distinct legal personality and is not a general partnership or a limited partnership. Its members’ liability is limited to the amount they have agreed to contribute to the LLP. However, it also shares some of the flexibility of a general partnership.

A limited liability partnership (LLP) agreement is a contract made between the members of an LLP to establish a fair relationship between them and to safeguard their investment. An LLP agreement can remain private, in contrast to a company’s Articles of Association.

New members

Unless the LLP agreement states otherwise, the admission of a new member needs the unanimous consent of the existing members. A simple or higher majority may be preferable. Members investing significantly more into the LLP may desire a greater say in the appointment of new members.

Management

Every member has the right to take part in the management of the LLP business, unless the LLP agreement states otherwise. This default position may not be suitable, particularly if some members have invested substantially more than others, or where certain members want to have more management control.

Profits & Finance

The default position is that all members are entitled to an equal share of the profits of an LLP. Members often want to change this default situation. Individual members may desire a larger or smaller share of profits, or different treatments for capital or income profits, maybe because they have invested either more money or more time in the LLP. The LLP agreement should record the investment to be made by each member and the entitlement of the members to any drawings 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; and

– certain ‘fundamental’ decisions affecting the LLP and its membership require unanimous agreement (such as the admission of a new member or a proposed change in the nature of the LLP’s business).

The requirement for a unanimous agreement is sometimes seen as unduly restrictive and LLP agreements often allow for a special majority decision instead – for example, three-quarters of members rather than unanimity. On the other hand, there may be decisions that can usually be effected by a single member or a simple majority of members, but which the members think are fundamental to their business and therefore require a special majority or unanimous decision (for example, entering into high value and/or long term contracts).

Exiting the LLP

A person may cease to be a member of an LLP on death – or on dissolution in the case of a corporate member – agreement of the members, or after giving reasonable notice to the other members.

A member cannot be expelled from membership unless the LLP agreement expressly provides for this. Common reasons for expulsion for a member might include:

– breaching the LLP agreement;

– ceasing to hold a relevant qualification;

– neglecting to perform his or her duties; or

– failing to pay any money owed to the LLP.

The LLP agreement should also deal with the repayment of capital (or otherwise) on the death, retirement or expulsion of a member, and should also include a mechanism for calculating the value of the relevant member’s share.

Non-Compete

The members are likely to know the LLP’s business extremely well, including the LLP’s customers and suppliers. An LLP agreement should protect the LLP’s business by including relevant non-compete terms. The members can agree that a member will not be permitted to create a competing business or work for such a business for a reasonable period after the member leaves. This non-compete should apply to a defined area.

With the aim of protecting the LLP’s business, LLP agreements often also contain terms to prevent members (while they remain members of the LLP, and for a reasonable period after they leave) from:

– poaching employees of the LLP;

– poaching customers from the LLP; and

– interfering with the LLP’s suppliers (for example, ensuring that a supplier no longer supplies goods or services to the LLP).

Conclusion

The importance of an LLP agreement to you will depend on your opinion of whether the provisions the law otherwise imposes 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 to cover other significant areas on which the general law is silent.

Source by James Patrick Quinn

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