Should I convert my partnership into an LLP?
A Limited Liability Partnership is becoming a more attractive legal structure now more than ever in light of the Covid-19 developments and as a result of the increased desire for traditional partnerships to obtain the key benefits afforded to an LLP including, in particular, the added security of creating a legal personality that is separate from that of its members and in turn ensuring that the members have limited liability.
The Key Features of an LLP
- LLP members have limited liability. The LLP owns the business and assets and is liable for its own debts; the members act as the LLP's agents and are only liable up to the amount they have contributed to the LLP.
- An LLP is a separate legal entity and can hold property, enter into contracts and sue and be sued.
- The LLP is taxed as a partnership.
- Any LLP Agreement is a confidential agreement and does not need to be filed at Companies House.
- An LLP has the organisational flexibility of a partnership.
- An LLP does not have any share capital meaning that there are no capital maintenance requirements.
- The accounting and filing requirements for an LLP are broadly the same as that for a company.
- An LLP can create floating charges.
The Transfer Process: Approval to Transfer the Partnership business and assets to an LLP
You will initially need to check the existing constitutional documents of the partnership to establish what kind of decision is needed to transfer the business and assets to an LLP. In the absence of any provisions in the constitutional documents dealing with such a decision, it is likely that a unanimous vote will be required so it is important to check that all current partners are happy with the proposals to convert to an LLP.
The Transfer Process: Documents Required
To transfer from an existing partnership into an LLP you will need the following documents:
- Form LL IN01
- Transfer Agreement
- LLP Agreement
The Transfer Process: Form LL IN01
Form LL IN01 is the form that is sent to Companies House to incorporate the LLP. This details the LLP's name, registered office and who the members and designated members will be.
An LLP must have at least two designated members, being members of the LLP with particular administrative functions including, but not limited to: signing the accounts and delivering these to Companies House; preparing, signing and delivering the confirmation statement to Companies House; and notifying Companies House of any changes to the LLP's membership, name or registered office.
Once complete, Form LL IN01 will need to be submitted to Companies House alongside the incorporation fee and, once accepted, the LLP will be issued with a certificate of incorporation.
The Transfer Process: The Transfer Agreement
The Transfer Agreement will document the conversion of the current partnership into the LLP and the transfer of the business, assets, any employees and property to the LLP. This should be entered into following incorporation of the LLP.
The transfer of employees to the LLP will constitute a TUPE transfer and therefore appropriate measures will need to be taken to ensure that the correct consultation process is complied with. As is the case with all TUPE transfers, any employee contracts will not be cancelled but will instead transfer to the LLP and there will be a continuity of employment.
You will need to identify any current contracts/licences/consents that are in place to consider what steps will need to be taken to assign and/or novate such arrangements to the LLP.
You will need to consult with your bank regarding transferring the partnership's banking arrangements to the LLP including any accounts, overdrafts and banking facilities. The bank may require personal guarantees from each member depending upon the banking facilities that are to be transferred and/or that will need to be put in place.
No monetary consideration is required for the transfer of the business and assets under the Transfer Agreement as the consideration element will be satisfied by the LLP's agreement to procure that each partner becomes a member of the LLP and the LLP's agreement to credit certain accounts maintained by the LLP for partners in their capacity as members.
The Transfer Process: The LLP Agreement
The LLP Agreement will document the internal management and workings of the LLP. As with a typical partnership agreement, this agreement allows you to set out the inner workings of the LLP including such details as profit sharing and retirement provisions in a non-public document.
A majority of the provisions contained within the existing partnership agreement can be inserted into the LLP Agreement but there are a number of fundamental differences between such agreements, the main one being that whereas a partnership agreement only deals with the relationship between the partners, the LLP Agreement will deal with the relationship between the members and the LLP. It is therefore important to undertake a review of the existing partnership agreement as a starting point to establish what will be carried over into the LLP Agreement, what changes will need to be made and what new provisions should be inserted. It is important to ensure that the LLP Agreement is comprehensive and properly drafted to ensure that the default legal provisions do not automatically apply which may lead to unintended consequences.
We are happy to assist with any queries that you may have regarding converting your partnership to an LLP. Please contact Richard Field on 01482 337218, John Flanagan on 01482 337308 or Donna Ashbridge on 01482 337300 if you require any assistance.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.