When should a partnership be an LLP?

A partnership can be a flexible business model, combining the expertise and the time of several business leaders into a single shared resource – and just giving you someone to talk to when you hit a problem, rather than trying to solve it alone.

But when should you register your partnership as an LLP – a Limited Liability Partnership? This is a 21st century business structure, which has existed since April 2001, so if you’re new to it don’t worry, as so are most other people.

With that in mind, it makes sense to get to know the definition of an LLP first, before you start to decide whether or not it is the right kind of business structure for you.

What is an LLP?

As the name suggests, an LLP limits the liability of its members – in a similar way to how a limited company can limit your liability as an individual, except that in this case, there are multiple members on relatively equal footing.

For tax purposes, an LLP is treated as a partnership, and in many other ways it is treated as a company. You must register a unique name for your LLP with Companies House, although if you already have a registered company there, you can also register an LLP with the same name.

As a partnership, an LLP must have two or more members – there is no such thing as a one-person partnership – but any agreements made between the members can be kept confidential, rather than being a matter of public record.

Significantly, an LLP can do the kinds of things that a natural person can do, including legal proceedings like being sued – and this is where it is possible for an LLP to shield you against direct legal action against your person.

What if someone leaves?

Membership of an LLP is not a lifelong commitment – members are free to leave, even if this takes the number of partners down to just one person.

However, you are not allowed to continue indefinitely with only one partner. To retain your limited liability status, you must appoint a new second member within the following six months.

This means that you cannot just name a second partner when you register your LLP to begin with, and then have them leave so that you get all of the benefits of limited liability, but with only one person in the ‘partnership’.

It also means that when you go into an LLP, you might want to be confident about how long the other members will stay – if you are left behind as the last partner standing and cannot find anyone to join you, it could end up as a big burden to bear.

When might I be personally liable?

There are a few situations where costs incurred by the LLP can become your personal liability. Here are some examples, although these are not all of the possible scenarios by any means.

If the LLP becomes insolvent, it has the option to recover up to the past two years’ withdrawals by its members, and this can include funds drawn from the LLP and loan repayments, along with property distributions, although a court will have to rule on whether or not to allow it.

An LLP may also require personal guarantees from its members. This is similar to the ways in which directors and shareholders may issue personal guarantees to companies, and you should check whether you are solely liable in this case, or whether the other members agree to share liability.

You will also be liable for your individual tax – you are taxed as in a normal partnership, so that you must pay the appropriate tax on your share of the LLP’s gains and any income derived from it.

Designated members

Finally, at least two partners in the LLP must be declared as ‘designated members’. This gives them responsibilities similar to a company director, such as filing accounts at Companies House, appointing auditors, and acting for the LLP during winding up procedures.

Again, you should keep a careful eye on your number of designated members. If only one designated member remains, then every other partner in the LLP automatically gains designated status – so if there is anyone involved who should not have that power, make sure you always have at least two designated members.

There are many other factors to consider, but this overview hopefully gives some insight into the kind of benefits and potential pitfalls that come with LLP status – and might help you to decide whether or not an LLP is the right structure for your partnership.