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What Is an LLP Agreement & Why Do I Need One?

25 September 2020

An LLP (limited liability partnership) is a type of business structure that is popular among professionals operating as partners – most typically architects, doctors and lawyers, where the partnership’s members require limited liability.

What is in an LLP Agreement?

An LLP agreement is a contract made between all the members of the LLP in order to establish and document the business relationship between them and certain rules governing the operation of the LLP

Whilst the partners in an LLP are not under any legal obligation to enter into a formal LLP agreement, it is almost always advisable to do so. An LLP agreement usually covers, among other things, the following key areas:

  • The rights and obligations of each member;
  • Means of regulating each member’s investment in the LLP;
  • Regulations for how company property is used and owned;
  • How profits or losses will be shared;
  • How the LLP is going to be governed;
  • How critical decisions will be made.

Once an LLP agreement is made, it will become binding on the partners as soon as the LLP has been registered at Companies House. (The LLP agreement itself does not need to be registered at Companies House and so remains private and confidential as amongst the members).

If an LLP agreement is not made, or it does not address certain critical points, then the relevant default provisions of the LLP Act 2000 and LLPs Regulations 2001 will apply. These default provisions may not be suitable however they will continue to apply unless and until a well-drafted LLP agreement is put into place.

How do you know if you need an LLP agreement?

Whilst they are not compulsory, it is widely agreed and recommended that an LLP agreement is important for a number of reasons, including:

  • A well-drafted LLP agreement provides much better certainty and clarity around each member’s expectations than the statutory default provisions;
  • It can help avoid unnecessary disputes, conflicts and misunderstandings;
  • It provides a solid framework of rules to help manage any potential disputes or conflicts that may occur.

The statutory default provisions are beyond the scope of this article. If they were to apply then you may find yourself in an unsatisfactory position for a number of reasons including an inability to control how the LLP’s profits are distributed, not being able to require a member to come to work and not having the ability to forcibly expel a member.

In summary, although an LLP is not legally bound to have a LLP Agreement, we strongly recommend having one in place covering all of the areas relevant to your business.

This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Paramjit Sehmi or write to us using the contact form below.

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