Disputes within a Limited Liability Partnership

Setting Up a LLP – Why You Need a Members’ Agreement

More often than not, people who choose to go into business together want something more formal than a basic partnership, so decide to go down the Limited Liability Partnership (LLP) route. However sometimes this kind of decision is made to quickly – and the enthusiasm to get the business started, shortcuts are taken and insufficient is given to properly setting up that LLP

But the danger in rushing headlong into launching the business is to risk serious problems,  and even litigation, emerging at a later date as a result. Those problems may have been there all along, but were simply not properly identified. If the business has already taken off, with goodwill from the customers along with a good profit, these issues can really turn the business into something worth fighting over – and LLP dispute litigation can prove very expensive.

Therefore if you’re thinking about using a LLP as your business structure, it’s important to ensure that you have a well drafted and written LLP Members’ Agreement in place before you start trading. If you have already started operating a business using an LLP, but don’t have a Members’ Agreement in place, it’s not too late – but do make sure that you get an Agreement in place as soon as you can.

My LLP Members Agreement – What Should I Include?

In an LLP, you and your business partners are legally referred to as LLP “members” rather than partners.

When it comes to drafting your Members’ Agreement,  it’s important to make sure that the agreement covers the needs of your particular business and circumstances – and that is properly drafted by an experienced solicitor. But some of the more essential clauses of that Limited Liability Partnership members agreement should cover the following issues;

  • identifying LLP  members
  • setting out members’ profit shares and their contributions to the capital of the business,
  • explaining how losses are to be dealt between the members
  • describing how money is to be taken out of the business
  • setting out how members are expected to act in relation to the business [e.g. are they permitted to have any other business interests – and if so are there any limitations on such outside work]
  • identifying what happens when one of the members dies
  • setting out the arrangements for additional members to be bought into the LLP – including details on how their share of the business is to be valued, and how payments are to be made (e.g. by prearranged instalments)
  • identifying the rules for leaving the LLP.
  • setting out how to resolve a dispute in your LLP

It’s not unusual when it comes to LLP is, for one of the Members to conclude that the business would be better if one or more of their business partners was excluded. They may look for ways of getting those other members removed, or decide to walk away from the existing business and start another similar business in its place. This can cause huge problems, and the first place to look for the way out of the problem is the Members’ Agreement, which should have clauses referring to resolving dispute.

However in the absence of a written members agreement, you simply can’t unilaterally kick out one or more of your partners.

Limited Liability Partnership Disputes – Common Causes

The most common causes of LLP disputes tend to involve the issues listed in the bullet point in the above section on what to include in your partnership agreement. Of those however, perhaps the most common of all concern two particular issues – the withdrawal of money from the LLP and issues surrounding the desired expulsion of one or more of the members.

So Without a Written Agreement, How Can We Expel a Member From Our LLP?

There can be plenty of reasons for wanting to get rid of one of your fellow partners in the business – for example, perhaps there simply under performing or not pulling their weight. How can you expel them?

In short you can’t – you do, however, have 3 limited options available to you.

1.      You might simply try to persuade them to voluntarily retire from the business
2.      You can make an  offer to buy out their LLP share at a fair value in an attempt to avoid Court action
3.      If the previous two options fail, the last resort is probably to make an application to court to actually wind up your limited liability partnership. Beware however. This kind of application to wind up your own business can be very damaging – not to mention expensive..

Whatever you do, in the absence of a clause in your Members’ Agreement allowing you to do so, our firm advice is not simply to try to expel a business partner you want rid of. This could result in court action and risks a significant legal costs order being made against you.

What’s more, if you’re already thinking about trying to expel a business partner, and you then enter into a written members agreement, or some other form of agreement and then rely on that to try to expel them soon after, do beware – and take specialist legal advice first. Otherwise there is a risk that in any subsequent litigation, you could be seen as acting in bad faith and again risk a sizeable costs order being made against you.

Does the Same Apply to LLPs and Partnerships Where There Isn’t a Written Agreement?

It’s wrong to assume that if the business is operating as a LLP without a Members’ Agreement, then legally you’re in the same position as being in a Partnership without a written Partnership Agreement.

The rules governing partnerships date back to the 1890 Partnership Act, but the default position for a LLP [as set down in the Limited Liability Partnerships Regulations 2001] aren’t in depth enough to give enough guidance to be able to sort out the sorts of issues which too often crop up. Often, where there isn’t a LLP Members’ Agreement, the participants find out that legally they are simply not allowed to do as they wish – for example they can’t simply expel a member from the LLP.

That’s why it’s particularly important to get a members agreement from the outset if you’re thinking of forming an LLP, or converting an existing business partnership into a Limited Liability Partnership.

How Do Verbal Agreements Affect My LLP?

The law surrounding LLP recognises verbal agreements and verbal variations to what is set down in writing. If you don’t write down the exact terms of the business and agree from the outset that any changes to the terms have to be put in writing and signed by all of the parties, it can be very difficult to pull together a clear statement of what was said by whom and when at a later date when you are ploughing through a mass of written statements, emails and other related documents.

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