LLP – the corporate option
Governments pass laws but the public decides how they will work – and you can trust the business community to find solutions that the lawmakers never dreamed of.
Limited Liability Partnerships were created to give limited liability to traditional partnerships as a legal alternative to forming a company. The idea caught on slowly… when the "LLP" first came onto to the scene some jokers at Companies House taunted the LLP Department by poking their head round the door to ask "had any applications today"! LLPs have become popular since those days and the format has been put to many creative uses.
One use that was largely unforeseen is the corporate option. The lawmakers may have presumed that most partnerships would be between people; but there’s nothing to stop two or more companies from forming a Limited Liability Partnership. It is a convenient device for formalising a business relationship and it can simplify the tax and profit relationship between the contracting companies. LLP member companies don’t even need to be registered in the UK. Partners who are private individuals can be of any nationality; and corporate Partners (member companies) may be registered almost anywhere in the world. A large number of LLPs are UK registered partnerships between companies registered in offshore locations or a combination of an offshore and a UK company.
From an accounting point of view, the relationship between the LLP Members allows profits to be split between the companies on a simple basis that can be defined between the members. Unlike a private limited company there is no statutory document to define the relationship between Members. Limited companies have legal documents called "Memorandum & Articles of Association" but LLPs do not. Limited companies have shares, which may be unevenly distributed between members to allow different degrees of ownership, but LLPs have nothing to differentiate between the different members. Some people may view these features as weaknesses in the LLP format which is the reason why we provide a partnership agreement template when we register an LLP. But it may be a positive advantage for the corporate partnership. Where there is no statutory definition of the relationship the matter is left open to be defined in a legal agreement worked out by the Members. The CD we provide for each LLP formation contains a standard Partnership Agreement for individuals and an alternative Corporate Partnership Agreement for use when the partnership is between companies.
Some LLPs use a hybrid solution, where one of the members is a private individual and the other is a company. In some cases this may be a grey solution to a problem in the LLP rules. Under the Companies Act 2006 the traditional rule, requiring at least two officers to be appointed for each company, was relaxed to allow only one. It is now possible to register a private limited company with a single director/shareholder and no other officers. But the minimum for a Limited Liability Partnership is two Designated Members. Once again, the corporate solution has been invoked to resolve the difficulty. Some people register a company, appointing a corporate secretary as signatory acting on their behalf; then form an LLP with their own name as the personal member and the company as corporate member… one LLP; two members; but one person behind it all.
So, the LLP has proved to be a flexible device. LLPs have been registered to link two charities working together on a joint project. LLPs have been formed as joint ventures between two or more businesses. LLPs can split profits between private individuals and corporate partners. They can divide the taxable profits between UK and overseas corporations or offshore companies.
The law created the format for LLPs, but smart business people determined how it is used.
For more information or to register your LLP go to www.orderedmanagement.co.uk/services/limited-liability-partnership
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