Questions of identity

A year after limited liability partnerships could be registered in the UK, nearly 1500 have been created. An LLP is akin to a partnership, but firms wishing to change should be aware that there are significant differences. As a result, a change to LLP status can involve partners having to re-examine the nature of their relationship on fundamental issues. Merely reproducing the existing partnership agreement is unlikely to deal with them adequately. This article discusses some problems that may arise.

An LLP involves a transaction – the transfer of the existing practice from the partners. So, the current partners will be the last, which means that all indemnities will land at their door. The last partners may have only one chance to provide protection from these liabilities, as it may not be possible to revisit the terms of the transfer if partners discover that the LLP did not give them enough.

Members of the LLP will have limited liability. Thus, it is easier for them to leave when times are bad. If this is a risk, the members' agreement may need to deal with this by, for example, restrictive covenants, "garden leave" clauses, "waiting rooms" and so on.

Members are not jointly and severally liable.

Thus there is no automatic entitlement to seek a contribution from other members if one has been sued personally.

To what extent should a member in this position be able to look to the other members? Are some members more at risk because of the involvement they take personally in their projects? If they contribute more financially to the firm, is it right that the other members can abandon them?

These questions may leave some members feeling uncomfortable. However, a right of contribution from other partners in such circumstances is likely simply to provide, indirectly, an additional right of recovery for creditors. If this is done, the benefit of having an LLP in the first place – limitation of financial liability – will be lost.

Many possibilities are opened up for giving membership of the partnership to employees or outside investors

The LLP, as a separate entity, will hold the business's assets. The LLP members' agreement should provide for the protection of current and retired members. But what if its assets are insufficient? Should current members take on personal obligations to indemnify former partners and former members? Should they personally guarantee the LLP's obligation to repay capital, pay for goodwill and annuities, maintain professional indemnity insurance and so on? To do so would limit the advantages of becoming an LLP. But can future members be trusted to ensure the LLP meets those obligations?

The LLP provides continuity. Members can retire, but the same LLP carries on the business, owned by the succeeding members. This means that decisions made now by the members will bind that LLP in the future. It may be important to establish that a decision was properly made so that future owners do not call into question the authority of former members. For many firms, this need for additional formality will change the way partners' meetings are run.

How many obligations should members undertake in favour of the LLP? A duty of good faith perhaps. But additional obligations may put them at risk of claims by the liquidator if the LLP goes under. A balance will need to be struck in the members' agreement and it will need to be drafted carefully so as not to make the members hostages to fortune.

In 10 years' time, who will be the members of the LLP? The fact that members have limited liability may mean that the firm is able to attract additional members. LLPs may as a result be able to provide better for succession.

In a partnership, there is often a direct correlation between the size of a partner's ownership interest, their profit share, their share of liability and their management influence. With an LLP, that is not necessary. This opens up many possibilities for having membership of the LLP directly or indirectly in the hands of others, such as employees and outside investors.