The Limited Liability Partnership Act 2000 (Act) and other legislation will impose certain rights and obligations on the members of an LLP. Having a written LLP agreement is important since it gives members the opportunity to vary or exclude the default position imposed by law and to establish an agreement in other areas. Many costly disputes have been resolved and problems avoided as a direct result of entering into an LLP agreement.

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 protect their investment. It has a separate 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, but it also shares some of a general partnership’s flexibility. Unlike a company’s Articles of Association, an LLP agreement can remain private. A limited liability partnership is a relatively new form of entity available since the Act.

The importance of an LLP agreement to you will depend on your view 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 important areas on which the general law is silent.

Member Decisions

Unless the LLP agreement says otherwise, ‘ordinary’ LLP business decisions are decided by a majority of members. Certain ‘fundamental’ decisions that affect the LLP and its membership – such as the admission of a new member or a proposed change in the nature of the LLP’s business – require unanimity. This requirement for a unanimous agreement may be seen as unduly restrictive. LLP agreements therefore frequently allow for a special majority decision instead – for example, two-thirds of members rather than unanimity. On the other hand, there may be decisions that ordinarily can be effected by a single member or a simple majority of members which the members think are fundamental to their business (for example, entering into high value and/or long term contracts), and which therefore require a special majority or unanimous decision .

New members and exiting the LLP

The admission of a new member requires the unanimous consent of the existing members, unless the LLP agreement says otherwise. This is one case where a simple or higher majority may be more suitable. Members investing significantly more into the LLP may want a greater say in the appointment of new members.

A person may cease to be a member of an LLP:

• on death (or dissolution if it is a corporate member);

• by agreement of the members; or

• giving reasonable notice to the other members.

A member can only be expelled from membership if the LLP agreement expressly provides for this. Common reasons for expulsion might include a member breaching the LLP agreement, neglecting to perform his or her duties, failing to pay any money owed to the LLP, or ceasing to hold a relevant qualification. The LLP agreement should also deal with the repayment of capital (or otherwise) on the death, retirement or expulsion of a member, and should include a mechanism for calculating the value of the relevant member’s share.

Management

Unless the LLP agreement says otherwise, every member has the right to take part in the management of the LLP business. This default position may not be suitable in cases where some members have invested significantly more than others, or where certain members want to have more management control.

Profits & Finance

All members are entitled to an equal share of the LLP’s profits by default, but members often want to vary this default situation. Individual members may want a larger or smaller share of profits, or different treatments for capital or income profits. This might be because they have invested more time or money in the LLP. The LLP agreement should record the investment to be made by each member and the members’ entitlement to drawings (if any) as an advance of their profit share.

Non-Compete

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

In an attempt to protect the LLP’s business, LLP agreements often also contain terms to prevent members from carrying out certain actions while they remain members of the LLP, and for a reasonable period after they leave. These might include interfering with the LLP’s suppliers (e.g. contriving that a supplier no longer supplies goods or services to the LLP), or poaching employees or customers from the LLP.