Status of an LLP' Members and Their Duties

The decision as to the form of business is very important. It can be costly and time consuming to change the form of a business once it is established. The decision should be incorporated in any business plan, factors which are relevant in making the final decision include:

Limited Liability of the LLP's Members

If the business itself is a high-risk business which may give rise to expensive legal action, e.g. the building trade, limiting the liability of the persons involved in it may be important, and a limited company the most appropriate form of business.

Outside and Inside of the LLP' Investors

The nature of investment in the business is another factor to be considered. If there is to be an outside investor then a limited company registration may be best. If the people carrying on the business are also the investors in the business, then a partnership may be more appropriate.

LLP' Members

The "members" of the LLP are the individual persons through whom the LLP operates. The term as it is used in the context of LLPs should not be confused with its meaning in the context of limited companies, since the member of an LLP will invariably have management as well as ownership rights. The legislation does not give a great deal of guidance as to the overall legal responsibilities and duties of members, other than to imply, by virtue of their status as experts of the LLP, that they owe fiduciary duties to it. The full extent of member' duties will, inevitably, fall to be clarified by the courts.

In relation to the specific areas of wrongful trading and clawback of withdrawals, referred to below, it is provided that the courts are required to assess a member's conduct in the light of the knowledge, skill and experience that may reasonably be expected of a person occupying that role. In the circumstances of these provisions at least, members will be expected to act in accordance with a legal benchmark of skill and care. The main issues associated with membership are as follows.

Appointment of LLP' Members & Their Activities

The first members of the limited liability partnership (as already stated there must be at least two of them and they may be individuals or corporate bodies) are those who are listed in the incorporation document as being its first members. Thereafter, the circumstances in which persons may become (and cease to be) members are left to be decided by the internal rules of the firm.

A member may cease to be a member in accordance with an agreement made with the other members or, in the absence of any agreement on the LLP starting up procedure to follow in this regard, by giving reasonable notice to the other members. Where persons either become or cease to be members, notification must be made to the Registrar within 14 days. Details of changes in the LLP name or address of a member will need to be filed within 28 days.

Status of an LLP' Members and Their Duties

The members of the LLP are, broadly, the equivalent of the partners in a partnership and the owner/managers of a limited company. Whereas partners in a partnership are (under English law) the experts of each other, members of an LLP are, expressly, experts of the LLP (s.6 of LLP Act). The members have a financial stake in the firm and, in the absence of contrary agreement, a right to participate in its management. Since the LLP, unlike the English partnership, has legal personality, it can and does act as a principal in agency terms.

That it is possible for a member of an LLP to be an employee. In the case at hand, apart from not raising any concerns about his status at any time prior to his departure, the Chief Investment Officer (CIO) could not be treated as an employee because he/she: -

• Had agreed to be bound by the LLP's members' agreement
• Was paid gross and he accounted for his own tax
• Was entitled to a discretionary distribution of surplus profit and
• Was entitled to share in the proceeds of a sale of the LLP or in its winding up

What lessons can be learnt from this decision? If you are thinking about admitting new members to your LLP, you should make it clear to your prospective members, particularly those who are existing employees, that they will be losing their employment status and associated rights. In addition, it is important that such members are given sufficient "self-employed" attributes in order to reduce the risk that a court in future years finds that the member is in actual fact an employee and seeks to apply employment legislation, to the detriment of the LLP.

Although HMRC currently treat all members of an LLP as self-employed from a tax perspective, it is possible they may adopt a similar test to determine the true status of an LLP member. Given that often the main reasons businesses choose an LLP as the vehicle through which to operate are its tax transparency and the scope to make substantial savings on employers' national insurance contributions, it is important that a members' agreement identifies the "self-employed" attributes of the members accurately.

Each member of the LLP can, therefore, bind the firm. Under s. 6(2) of the LLP Act, however, the LLP will not be bound by the actions of a member if that member has no authority to act for the LLP in the respect concerned and the person they deal with either knows that they lack such authority or does not know or believe them to be a member of the LLP.

As far as third parties dealing with an LLP are concerned, a person who has ceased to be a member is regarded as still being a member unless the third party has had notice of such cessation or due notice of the member's cessation has been delivered to the Registrar as required. Thus, departing members should, in their own interests, make sure that proper notice is given. s.4(4) of the LLP Act provides that a member shall not be regarded as being an "employee" of the LLP unless, in the case of a converting partnership, he or she was regarded as being an employee of that partnership. The intention of this appears to be to ensure that a salaried partner of a partnership which converts to LLP status may continue to be deemed to be an employee.

Designated Members and Their Obligations

UK LLP designated members: the term "designated member" is introduced by the Act to indicate the persons within the LLP who are to assume responsibility for certain statutory compliance functions on behalf of the firm. Designated members are responsible under the Act for putting their names to and/or filing a range of statutory documents, such as the submitting annual accounts, filing the annual return and details of changes in membership. In this, their role will be comparable to functions carried out by the directors and secretary of a limited company. There must be at least two designated members in each firm: if the number falls below two, every member is deemed to be a designated member.

Where an LLP fails to comply with a specific obligation, in most cases both the LLP and its designated members will have committed an offence. Each LLP must, on incorporation, indicate which of its members is to hold the post of "designated member" (or state that every member is to be a "designated member"). Where individual members are specified at the outset, others may become designated members at any time by agreement with the other members. Details of resignations and appointments of designated members are required to be notified to the Registrar in an approved format within 14 days. (This does not apply where the LLP has declared to the Companies Registrar that all of its members are to be "designated members").

Shadow Members and Their Duties with the HMRC

The company law concept of "shadow director" is extended to LLPs. Thus, in the (perhaps unlikely) event that the members of an individual LLP are collectively accustomed to acting in accordance with the instructions of a particular person, that person will be deemed to be a "shadow member" of the LLP and will be subject to the same liabilities as members proper. A person who issues instructions purely in a professional advisory capacity will not be deemed to be a shadow member.

Disputes in Between Members and the Tax Office

While the expectation is that LLPs will make their own arrangements to provide for dispute resolution, there are three residual statutory provisions in this regard. First, the regulations apply to LLPs sections Companies Act. These sections, as they apply currently to companies, entitle a member or members with a minority interest to petition the court on the ground that the affairs of their company are being run in a way which is unfairly prejudicial to their interests.

If, on an application by a member or members of an LLP, the court finds in favour of the applicants, it may order, inter alia, the petitioning members' interests to be bought out or that a change be made in the LLP partnership agreement. Note, however, that members of an LLP can, by unanimous written agreement, determine to exclude the application of the sections concerned for whatever period they determine.

Conceivably, the exclusion could be of indefinite duration. Second, under a modified version of Companies Act, the Secretary of State may initiate a formal statutory investigation into the LLP's affairs on the application of 20% of the current membership of the LLP. Third, paragraph eight of the LLP Regulations states that no majority of members of an LLP may expel any member unless a power to do so has been conferred by express agreement between the members.

The LLP may notify the Registrar that all members of the limited liability partnership are designated members or that specified members will be designated; the effect will be as though this had been stated in the incorporation document. When a person ceases to be a member of the LLP, that person also ceases to be a designated member. The following functions may only be performed by, or are the responsibility solely of, a designated member or designated members of a limited liability partnership.

Signing the balance sheet in the annual accounts, filing annual accounts with the Registrar, signing annual return forms (and associated penalty for non-filing). Appointing the auditors, fixing the auditors' remuneration (members may determine another method of fixing remuneration), removing the auditors. Signing forms for voluntary striking off of limited liability partnership (and related duties assigned to designated members).

The duty to comply with an order for enforcement of delivery of documents to the Registrar, formal documents for LLP may be served on a designated member. Various functions under the Insolvency Act 1986 including: -

• Giving a statutory declaration of solvency preceding a members' voluntary liquidation and making a statement of affairs in a creditor's voluntary liquidation
• A designated member in default is liable to a penalty in certain cases such as the failure of an LLP to change its name following a direction to do so and in relation to failures to carry out responsibilities as set out above

Liabilities of the LLP' Members and the Designated Members

This issue can be looked at under three main headings:

• Financial liability
• Criminal and civil liability under the LLP Act and regulations
• Disqualification

Financial Liability - Members' Guarantees

S. 1(4) of the UK Limited Liability Partnership Act states that the members of an LLP have such liability to contribute to the firm's assets in the event of its winding up as is provided for in the Act. The LLP Regulations expand on this by modifying, in its application to LLPs, s. 74 of the Insolvency Act 1986. This modified section provides that, in a winding up, any present or past member is liable to contribute financially to the extent that they have agreed with the LLP or with other members. However, a person who has ceased to be a member will not be liable if the agreement between them and the firm exempts them from continuing liability.

Therefore, if the agreement between the members requires each to pay the £100 on the winding up, this is the amount which the law requires them to pay to the liquidator. To this extent, the position of the member as regards personal liability is comparable to that of the member of a company limited by guarantee. It will be up to each LLP, when drafting its own partnership agreement, to decide how it wishes to deal with this aspect.