An LLP agreement is a legally binding contract entered into by members (partners) of a limited liability partnership. The purpose of this document is to establish a fair business relationship between members, ensuring that the rights and interests of each individual and the LLP as a whole are protected. Whilst there is no statutory requirement to have one, the importance of an LLP agreement should not be underestimated.
The Limited Liability Partnerships Act 2000 and supplementary LLP legislation impose very few rules on the internal structure and management of LLPs.
Unlike limited companies, LLPs do not have articles of association or any equivalent statutory document. This facilitates greater freedom and flexibility compared to the limited company structure. In practice, however, it can be problematic if a customised LLP agreement is not put in place.
What to include in an LLP agreement
Created and agreed upon by the members of a limited liability partnership, a well-drafted LLP agreement sets out key details and operational rules relating to the business.
The specific terms should be carefully considered and determined by the particular needs and requirements of the LLP and its members. In general, however, an LLP agreement will usually include:
Details about the business
- Registered name of the LLP
- Registered office address
- Purpose of the LLP and the nature of the activities it carries out
Information relating to LLP members
- Name of each LLP member
- Names of designated members
- Whether the LLP imposes a minimum (above two) or maximum number of members at any given time
- Procedures for the appointment of new members
- Procedures for the resignation, retirement, incapacitation, or death of an existing member
- Provisions for the expulsion of members
- Collective rights, duties, and responsibilities of all LLP members
- Rights, duties, and responsibilities of individual LLP members
- Capital contribution of members
- Details of any additional investment
- Details of loans and mortgages
- Distribution of LLP profits to members
- Remuneration of any salaried LLP members
- Allowable expenses
- Rules for withdrawing money from the LLP
- Liability of members, i.e. how much they must contribute if the LLP becomes insolvent
- Indemnity clauses
- How business costs and losses are shared between members, including rent and mortgages, stock and equipment, utilities and other operational expenses, staff costs, and VAT
- Capital distribution when a member leaves or in the event of the LLP winding up
- Ownership of business assets, i.e. whether they are owned by the LLP or individual members
- Day-to-day management structure and arrangements
- Decisions-making rules, restrictions, and procedures
- Dispute resolution procedures
- Resignation notice periods
- Any restrictive covenants and conditions imposed upon members when they leave the LLP, including non-compete, non-solicitation, and confidentiality clauses
- Circumstances under which the LLP will be wound up
A simple, standardised LLP agreement will usually suffice for small LLPs in which each member has equal or similar rights, interests, and duties. However, many LLPs have more complex needs – for example, if members have varying levels of seniority or profit entitlement.
If no LLP agreement is put in place, the default provisions in the LLP Act 2000 and the Limited Liability Partnership Regulations 2001 will apply. Under the statutory provisions, all members have equal rights, powers, and obligations. Whilst these may be suitable for some LLPs, they are generally too restrictive for most LLPs and their members.
An LLP agreement is the most effective way to provide clarity, protect members’ rights and interests, and minimise the risk of misunderstandings and disputes that could jeopardise the success of the business. Depending on the needs and complexity of your LLP, you may wish to consult a solicitor for expert help and advice when creating an LLP agreement.
Free LLP agreement from 1st Formations
At 1st Formations, we offer a Limited Liability Partnership Package for just £34.99 plus VAT, which is ideal for any type of business that would normally operate as a traditional partnership, but whose members require limited liability.
Providing online registration with Companies House in 3 to 6 working hours (subject to Companies House workload), our LLP Package includes a free draft LLP agreement, digital and printed LLP documents, and access to 1st Formations Online Company Manager, where you can maintain and update your LLP details.
When your application has been approved at Companies House, we will send the Certificate of Incorporation, LLP documents, and a draft LLP agreement to your email address. If you require a formal LLP agreement, simply email your completed draft to 1st Formations and we will prepare and deliver two printed copies of the document by 1st class post.