Law guide: Business start-up

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Legal requirements

Legal requirements

Legal status of LLPs

A limited liability partnership has its separate legal identity. This means it's:

  • liable for its debts
  • able to enter into contracts; and
  • vicariously liable for its agents, which means it can be sued for the actions of its members and employees.

Therefore, the presumption is that contracts are entered into by and with the LLP itself (as opposed to by its members). As a result, members of the LLP only have exposure to liability for debts up to their financial interests in the LLP.

An exception to this rule is where a member has assumed personal responsibility to the client for carrying out the work. In these cases, a member may be personally liable for the full amount. Members will remain personally liable if they're the contracting parties.

In addition, members may also be liable to contribute towards an LLP if a court orders them to do so when the partnership is wound up, although the court would only order this in rare circumstances.

Legal requirements of an LLP

An LLP must have at least 2 members. The members can be individuals, companies, or partnerships. If the number of members falls below 2, the LLP can be wound up and struck off the Register.

There must also be at least 2 designated members, responsible for filing all legal documents at Companies House.

Unlike a company, an LLP doesn't need any equivalent of a memorandum or articles of association, which is a set of rules that governs how the business is run.

In order to register ('incorporate'), the LLP must be established to make a profit. When registering, 2 or more people must sign an incorporation document. These people will become the initial members and can then agree that other people become members.

The incorporation document must be in an approved form (Form LL IN01) and must state:

  • the name of the LLP (you'd need to check at Companies House that this is not a name which has already been registered);
  • whether the registered office is in England and Wales, Northern Ireland or Scotland;
  • the address of the registered office;
  • the name, address and date of birth of the initial members and contain their signature of consent to act; and
  • the names of the designated members (there must be at least 2 designated members).

Note that the Registrar of Companies can omit the day of the date of birth of the members from the public register.

The incorporation document must then be sent to the Registrar of Companies, which is the official responsible for Companies House.

The form contains a statement to the Registrar that 2 or more of the named members are 'associated for carrying on a lawful business with a view to profit'. This statement must be signed by a solicitor forming the LLP or a member named in the application. You could face criminal penalties if you give a false declaration.

The LLP doesn't legally exist until the Registrar issues a certificate of incorporation.

Statement of Persons with Significant Control

LLPs have to file, with the application to register, an initial statement of the people that have significant control over the decisions of the LLP (called Persons with Significant Control or 'PSCs').

A PSC in relation to an LLP is a person who meets one or more of the following conditions in relation to that LLP:

1. Directly or indirectly holds the right to share in more than 25% of the surplus assets on winding up

2. Directly or indirectly has more than 25% of the voting rights on matters decided by the members

3. Directly or indirectly holds the right to appoint and remove a majority of those entitled to take part in the LLP's management

4. Has the right to exercise or actually exercises significant influence or control over the LLP (this is only relevant if none of the above conditions are satisfied).

5. Has the right to exercise or actually exercises significant influence or control over a trust or firm that is not a legal entity but which would satisfy any of the above 4 conditions.

These provisions are aimed at making LLPs disclose the people who direct the activities of the LLP and ensure it acts in the way they want it to.

If there is another legal entity that fulfils the requirements above (e.g. if the controlling vote is held by a company) and also is subject to requirements to have its own PSC register, that controlling company will be a Relevant Legal Entity (RLE). Its details must be included on the PSC register of the LLP it controls.

There are certain exceptions where persons influencing the company's decisions are not automatically PSCs. These include professional advisers (such as lawyers and accountants) and people who have a commercial relationship with the LLP (such as suppliers and lenders).

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