Definition of an LLP Agreement
An LLP agreement is an essential agreement that is entered into by the partners of a limited liability partnership, which deals with the internal working of the LLP, as well as how the assets of the LLP are dealt with when the relationship breaks down. The LLP agreement is crucial in determining how the LLP will be managed, what each partner will contribute to the LLP and how profit will be shared between partners. It is also crucial in determining how the assets of the LLP will be shared if the LLP is dissolved.
The LLP agreement is the private agreement that governs the rights and obligations between the partners. It is tailored to the specific needs of the LLP and its partners. The default statutory provisions contained in the Limited Liability Partnerships Act 2000 (the LLP Act) can be disapplied where the LLP agreement deals with issues that are covered by the LLP Act. Where there are gaps in the LLP agreement, the default statutory provisions will apply.
By way of example, the LLP Act states that any changes to the management of the business of the LLP must be made unanimously by all the members of the LLP . It also states that the LLP agreement can be changed by unanimous decision. As a general rule, the default statutory provisions under the LLP Act will apply if a LLP agreement makes no reference to changes to the management of the business of the LLP or how to amend the LLP agreement.
The LLP agreement is particularly important where there are individuals involved in the LLP that will be working together. It provides that comfort that they will be able to work together as it sets out the terms of their relationship within the LLP.
The LLP agreement comprises many aspects of the relationship between the partners and the position of each partner should the LLP terminate or wind up. The LLP agreement will normally include the following:
The partnership can disapply the statutory default rules in the LLP Act that provides for each of the above points, so although LLP agreements may differ from one LLP to another (especially where there is no requirement of an LLP agreement by the members), the statutory provisions that apply will remain the same.
Main Elements of an LLP Agreement
As with articles seven through 12 in a standard operating agreement, an LLP will typically include specific clauses related partnership contributions to the company, how profits and losses are to be shared among the partners, governance structure, just to name a few. The terms Lloyd & Feddon is accustomed to seeing include:
Contributions to Partnership: Each partner will contribute, either in cash or otherwise, a specific amount, which will be reflected in the articles of organization. These company contributions can also come in the form of assets, business equipment, etc. Standard agreements will lay out each partner’s contribution to the LLP, something that should be agreed to by all. Sharing of Profit and Losses: LLP agreements will stipulate how profits and losses are to be shared amongst partners according to their investment in the company and/or by mutual agreement. This section of an agreement is more reflective of how an LLP does business than how a partnership generally operates, as partnerships often do not include compensation for that partner who contributes the majority of the capital investment. Control: This provision outlines how company decisions are to be made on behalf of members and may stipulate how many voting partners must be in agreement for a decision to be put in place. The agreement should also address whether or not partners can assign their right to vote to someone else. The provision may detail what sorts of issues require a vote. Dispute Resolution: Because LLPs do not have the protections of corporations and instead operate like general partnerships, the risk of being held personally and financially responsible makes it vital for a dispute resolution clause to be included in an LLP agreement. In order to avoid litigation, the partners in an LLP should specify what options are available if a dispute should arise, such as mediation, arbitration, or a simple buyout.
Benefits of Forming an LLP Agreement
Having a well-drafted LLP agreement is invaluable to any LLP as it sets out the rules governing the relationship between the LLP itself and each of the partners within it. Although there is the statutory default regime in the Limited Liability Partnerships Act 2000 which sets out the default position in the absence of a written agreement, having an LLP agreement in place offers far more flexibility than the statutory default position and allows the LLP and its partners to control all aspects of their internal management.
We highlight below some advantages of having an LLP agreement in place:
The key to these advantages is having an LLP agreement in place. The agreement provides much clearer terms upon which the partners can focus on their business with the knowledge that they have clear rights and obligations to one another and a degree of certainty and security that their interests are protected under the terms of a carefully drafted agreement.
How to Draft an Effective LLP Agreement
As with any contract, the process of drafting an LLP agreement is pivotal to ensure the document meets the requirements of the partners and conforms to the purpose of the arrangement. Importantly, legal counsel should be involved from the outset to help guide negotiations and ensure the agreement is legally compliant. Once a draft is produced, the partners should consider it carefully to ensure all relevant issues have been satisfied them and that it conforms to their understanding and intentions. The partners then must sign the agreement to make it binding. The following are common steps involved in the process of drafting an LLP agreement: 1. Legal counsel meeting with partners for initial consultation. Counsel often meets with each partner individually to fully understand concerns they may have and issues that may need to be addressed . Partner input is key to a successful negotiation process. 2. Working draft of LLP agreement prepared by legal counsel. A draft may be presented to partners that contains provisions on issues such as capital contributions, management structure and responsibilities, financial obligations and distributions, and the process for handling disputes. 3. Consultation process. The partners communicate their thoughts about the draft, and legal counsel continues to work with the partners to address issues and finalize any additional terms. The partners must agree to each separate term in the agreement. 4. Revisions and final draft. Once all issues have been discussed and any necessary terms have been incorporated, the LLP agreement may be ready for the parties to sign. It is important that each partner knows enough about the terms of the agreement so that they can feel comfortable executing it.
Pitfalls to Avoid with LLP Agreements
Common mistakes to avoid in LLP agreements:
In attempting to be overly precise and specific, sometimes LLP agreements contain terms which are unhelpful and practically unnecessary or which are in conflict with the Limited Liability Partnerships Act 2000 (the "LLP Act"). For example, there are several first principles of LLP regulation which are sometimes overlooked, but can cause a clause in an LLP agreement to be void.
The LLP Act provides certain default provisions which will apply in respect of matters not dealt with in the LLP agreement. These include:
Often LLP agreements will contain clauses which try to change these default provisions. For example, an LLP agreement may state that all members’ decisions require approval from a specified majority. However, where a super majority is written into an LLP agreement, if it is intended that the super majority be required in respect of all decisions then it needs to be expressly stated that the matters outlined in the last two points above require a simple majority. Otherwise, there could be a conflict with the default provisions and potentially would render the whole clause unenforceable.
Saying the same thing twice and effectively repeating a clause can also be unhelpful and can lead to ambiguity and confusion regarding what your intentions actually are. This can result in unnecessary disputes and litigation. Avoiding unnecessary repetition will assist in making your clauses clear and protecting you from having them struck out as being not legal and enforceable.
An LLP may also include terms and conditions of a member’s employment. A member’s employment can be protected in the following ways:
But these protections do not apply where the member is also a partner in the LLP, unless (in the case of wrongful dismissal) the claim can be brought against the LLP separately and the member can afford to bring a claim against the LLP for the loss of their employment (as opposed to their share of the business). In order to be valid, any provisions relating to the member’s employment need to be separate from the LLP Agreement. Therefore your LLP Agreement should make it clear that any other agreement relating to the employment of the member is separate from it and should be read as such.
Amending and Updating LLP Agreements
Over time, however, changes in the law may make these original terms impractical or change in membership may require adjustment of an LLP agreement. All LLP agreements are subject to periodic review and can be amended by unanimous agreement of the partners. These amendments are fully enforceable as if included in the original agreement. Even where no amendment is executed, an LLP agreement may be considered modified by a course of conduct — that is, based on the actual actions of partners which demonstrate their intent to be bound by a particular provision.
Modifications may also be made to the LLP agreement without affecting the original document or creating a separate contract. For instance, certain provisions of an LLP agreement may be subject to bylaw changes or adoption of new bylaws on a mere majority vote of the partners. The bylaws then effectively amend the joint venture agreement in regard to the specific issue governed by the amendment. Changes to an LLP agreement or bylaws may not apply retroactively. However , certain amendments to an LLP agreement are easily implied or carried out in order to address the situation at hand. For example, the addition of a third partner, whether it be the surviving spouse of a deceased partner or through the voluntary efforts of a previously unaffiliated party, will require the issuance of additional partnership interests. As a status interest holder, the third partner should understand and agree to the manner of distribution of controls, responsibilities and profits. The absence of an amended or new LLP agreement doesn’t prevent the third party from being considered a partner; however, this absence may create confusion over the applicable conditions of sharing control, profits and responsibilities.