Part 3 LLP membership – duties and responsibilities
February 2013
An LLP must have at least two members [Note 1]. If the LLP continues to trade and the membership falls to one person for a period of more than six months then that person is jointly and severally liable with the partnership for the debts incurred during that period [Note 2]. The number of members falling below two is also grounds for winding up the LLP (see paragraph 53A.106). There is no upper limit on the number of members an LLP may have. On incorporation the members of an LLP are those who signed their names on the incorporation document (see paragraph 53A.17) [Note 3]. After incorporation an individual, company, LLP etc may become a member of an LLP with the agreement of the existing members [Note 4]. An individual who dies or a corporate body that is dissolved ceases to be a member of an LLP [Note 5].
53A.34 Listing the names of the members of an LLP
Where an LLP has 20 or fewer members the names of the members must be listed on the headed paper. If the members are greater than 20 it is sufficient to keep at its principal place of business a legible list of members which can be viewed [Note 6].
53A.35 Consequences of a failure to disclose an LLP name or members
An LLP in entering into a contract with a third party may fail to disclose its name or the names of its members, if under 20. Where the third party can show that the failure to disclose resulted in a financial loss or stopped them from making a claim under the contract the LLP may be unable to enforce its rights under the terms of the contract unless a court is satisfied it is just and equitable for it to do so [Note 7].
53A.36 Rights and duties of a member of an LLP
The rights and duties of the members of an LLP and the relationship between the members and the LLP are set out in legislation or the LLP agreement, if any [Note 8]. LLP members do not owe a fiduciary duty to other members or the LLP unless there are express contractual clauses in the LLP agreement or they act as an agent of the partnership (see paragraph 53A.37) [Note 9].
53A.37 A member of an LLP is an agent of the LLP
A member of an LLP is automatically deemed to be an agent of the LLP [Note 10]. The member is expected to show a duty of care only in relation to those transactions he/she enters into on behalf of the LLP [Note 11]. This duty of care includes:
53A.38 Designated members of LLPs
Every LLP must have at least two designated members who may be corporate or individual members (see paragraphs 53A.40 and 53A.41). The incorporation document (see paragraph 53A.17) shows the identity of the first designated members [Note 12] or may simply state every person who is, or becomes, a member is a designated member [Note 13]. In the absence of any members being identified as designated members, or if the number falls below two, then all members of the LLP are considered to be designated members [Note 14].
53A.39 Changes in an LLP’s designated members
The LLP may, at any time, deliver to the registrar of companies details of specific members who are to be considered designated members. The LLP may also give notice that every person who is, or becomes, a member is a designated member. This notice is to be treated as if the information was provided on the incorporation document [Note 15]. An individual, company, LLP, etc. ceases to be a designated member if they cease to be a member (see paragraphs 53A.33 and 53A.43) [Note 16].
53A.40 Duties of a designated member of an LLP
In addition to the duties of an ordinary LLP member (see paragraphs 53A.36 and 53A.37), a designated member has the following additional responsibilities:
53A.41 Designated members’ additional management powers
A designated member may acquire management powers in addition to those mentioned in paragraph 53A.40 by a partnership agreement (see paragraph 53A.44). Such management powers may be similar to the powers of a director of a limited company.
A shadow member is a members on whose instructions and directions the other members are accustomed to act. An individual solely providing professional advice is unlikely to be treated as a shadow member [Note 17]. A shadow member often acts behind the scenes, which may be because there is a reason why they cannot be formally appointed.
53A.43 Resigning as a member of an LLP
An individual, company, LLP, etc. may cease to be a member of an LLP with the agreement of the other members or by giving reasonable notice to the other members [Note 18].
53A.44 Limited liability partnership agreement
There is no statutory compulsion on an LLP to adopt a limited liability partnership agreement. However the legislation allows members to enter into a formal agreement governing their mutual rights and duties in relation to each other and the LLP [Note 19]. If the LLP fails to adopt such an agreement default provisions apply (see paragraph 53A.45) [Note 20]. The agreement is likely to be in writing although a verbal or implied agreement may be sufficient to displace the default provisions.
53A.45 Matters to be covered by an LLP agreement
It is anticipated that most larger LLPs will adopt a written agreement which would be expected to cover the following:
A written LLP agreement is not a public document and is unlikely be filed with the registrar of companies. There is no requirement for the agreement to be available for inspection to other than the LLP’s members.
53A.47 Default partnership agreement for an LLP
In the absence of a written or verbal partnership agreement the legislation provides for a number of default provisions [Note 21]. There provisions are:
53A.48 Members not usually employees
Members of an LLP are usually not considered to be employees of the LLP. A member may opt to be both an employee (thereby receiving a salary and paying schedule E tax) and a member (thereby receiving a share of the profits and paying schedule D tax) [Note 22].
53A.49 Winding-up or bankruptcy of a member of an LLP
If a member of an LLP is wound-up or made bankrupt they may not be involved in the management of or administration of any business or affairs of the LLP. This prohibition extends to the liquidator or trustee in bankruptcy of a member [Note 23]. To enable an LLP to enter into a voluntary arrangement, which may include its members, the only restrictions on members entering into insolvency proceedings are those relating to winding up or bankruptcy orders. This would enable members subject to a voluntary arrangement to continue to take part in the management or affairs of the LLP.
53A.50 Dealing with the winding-up or bankruptcy of a member of an LLP
Where a winding-up or bankruptcy order is made against a member of an LLP the official receiver should seek to realise that member’s interest in the partnership. Any LLP agreement (see paragraph 53A.45) may set out the terms under which an insolvent member’s interest can be transferred. Alternatively, the official receiver (or his/her agents) may be able to sell the interest to the solvent members or a third party introduced by them. To ensure any sale is for market value the official receiver, in all cases, should obtain an independent valuation of the LLP at the purchaser’s expense.
53A.51 Disqualification of a member of an LLP
Where a director of a limited company is subject to a disqualification order/undertaking he/she is barred from being a member or taking part in the management of an LLP without the agreement of the court [Note 24]. For information on disqualification proceedings arising from the liquidation of an LLP see paragraph 53A.104.
53A.52 Bankruptcy and bankruptcy restriction of a member of an LLP
An undischarged bankrupt cannot be a member or take part in the management of an LLP without the agreement of the court. Where a bankrupt is subject to a bankruptcy restriction order/undertaking he/she remains barred from being a member or taking part in the management of an LLP, without the agreement of the court, for the period of the order/undertaking [Note 25].
[Back to Part 2 Incorporation of an LLP] [On to Part 4 LLPs – accounts, annual returns and charges]