News

Apr 6 2001

Banking\Litigation - Limited Liabilty Partnerships

What is it all about?

Since 6th April 2001, "two or more persons carrying on any lawful business with a view to profit" could form, or transform, into a Limited Liability Partnership ("LLP"). The main point of LLP's is to allow the members (as partners in LLP's are called) protection from unlimited liability.

LLP's were originally designed as an alternative trading vehicle for professionals who traditionally trade as a partnership with unlimited joint and several liability, such as accountants, lawyers and surveyors, but, due to allegations of unwarranted favouritism for such professions, have been made available to all business.

Why should I care?

An LLP is neither corporate fish nor partnership fowl.

It is like a company in that it is a legal entity separate from its members so able to enter into contracts and own property. The LLP is liable for debts and obligations incurred, not the members. Changes to membership do not affect its existence.

However, LLP's are not governed by memorandum and articles so can have the organisational flexibility of a partnership. This means reorganisation of members and capital can take place quickly and without prior notice.

Further, although originally envisaged to be only for professional partnerships' trading needs, creative minds are, unsurprisingly, looking at ways of using LLP's as tax efficient joint venture and investment vehicles.

This means there are a whole new set of factors to take into account in entering into banking and loan relationships with LLP's.

So what do I need to know?

The edited highlights are:-

There must be a minimum of two members. There is no maximum.
A company can be a member.
An LLP is a separate legal entity bound, in most circumstances, by the acts of its members who are its agents.
The LLP can, therefore, enter into contracts including fixed and floating charges.
The members are not personally responsible for any liabilities of the LLP.
The rights and duties of members can be governed by an agreement, which is not required to be a matter of public record. If no agreement is made, there are statutory default provisions.
An LLP must file Annual Returns and Audited Accounts like a company but there are no capital maintenance requirements.
Members are taxed individually on profits of the LLP as if it were a partnership BUT the Inland Revenue says this will not apply to businesses for which the LLP regime was not intended.
Corporate Insolvency Rules apply with additional protection regarding members' withdrawals of capital in periods leading up to the insolvency.

And your point is?

Factors relevant to a banking relationship with an LLP are:-

Banks and lenders are contracting with the LLP, not the members, so it is the financial standing of the LLP that is relevant to assess covenant strength and availability of security.
The LLP can change its membership and financial structure quickly and without statutory limitation on withdrawal of capital. A bank or lender may need to seek to limit this flexibility or ignore any present position when assessing covenant strength.
The LLP may be an empty shell without key members and they may be free to leave at any time. In this case, a bank or lender will need to consider if this is the case and protect its position, possibly by taking personal security.
Any business transforming into an LLP will need its present banking and/or loan relationships wholly re-documented and possibly re-organised.
A bank or lender will be able to take corporate type security, such as charges over book debts and receivables from an LLP, but realisation of WIP in professional practices can be difficult.
In more imaginatively structured investment or joint venture LLP's, the fact that the tax position is nebulous will need to be taken into account.

The bottom line

The LLP is a creation which brings a whole new set of considerations to a bank or lender's relationship with it. The purpose, structure and organisation of the LLP may well be as important to a bank or lender as its assets.

Each deal with an LLP is a leap into the unknown as no-one can be sure how it will work. Obviously, time will remove some of the uncertainties but in the meantime, if you remember only one thing, remember that few, if any, of the rules you use when dealing with companies and partnerships apply and you must start again from scratch.

Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.

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