Partnerships are one of the most common types of business structure – especially for companies with more than one owner. Partnerships can be of two broad types – a general partnership or a limited liability partnership, commonly referred to as LLP. This article covers what both types are, the pros and cons of an LLP, and the LLP agreement.
Limited Liability Partnership
A limited liability partnership is a partnership structure where all owners of the business have limited personal liability concerning the business’ financial obligations. Limited liability indicates that in case of bankruptcy or financial troubles, the limited partners will only lose money they have invested in the business and not any other personal assets.
This is unlike general partnerships where all partners have unlimited liability and in case of financial trouble, have personal assets at risk.
An LLP generally has at least one limited partner but there is no upper limit to the number of limited partners there may be in a business. There also needs to be at least one, but no more than twenty, general partners (those with unlimited liability). As stated above, the limited partner is only held liable for the investment they have made into the business only. This amount is stated on the record that is maintained by the NSW Fair Trading. Both general and limited partners can be an individual or any legal entity, e.g. a corporation. Formation of the LLP, like any general partnership, is through the partnership agreement.
Operations
General partners in an LLP overlook the day-to-day management of the business. As they have unlimited liability, they are also eligible to enter into binding contracts on behalf of the business.
On the other hand, the limited partners have a passive role and cannot actively engage in business management. They lack the ability and authority to enter into contracts on behalf of the partnership as their liability for the business’ debt and financial obligations are limited.
What is an LLP Agreement?
Similar to a general partnership agreement, the LLP agreement is a contract made between all partners of the limited liability partnership. It covers the business relationship between the partners, and certain policies and codes to follow during operations. An LLP agreement usually covers the following key aspects:
- The rights and obligations of each member
The agreement should detail what roles and responsibilities the general partners have taken on. Partners may be responsible for different aspects of the business and clear documentation of the roles ensures everyone is on the same page regarding their responsibilities. Limited partners will have no role in the day-to-day management of the business.
- Financial contributions by each member of the LLP
The contributions made by both the general and limited partners should be documented. The contributions of the limited partners are recorded with NSW Fair Trading but it is wise to record the contributions of all the partners and document them in the agreement.
- Sharing of profits and losses
Similar to the contributions, it is also important to agree upon and identify the ratio in which the profits and losses will be shared. In some cases, all partners split the profits and losses equally. However, in an LLP, since the limited partners have limited liability and managerial contributions, the split may be decided differently.
- Decision-making
This clause outlines the decision-making criteria for the business and also what types of decisions will require the participation of the partners. Decisions could be made by
- Unanimous votes
- Majority of partners
- A single partner who decides on behalf of all the partners.
It is also wise to decide and document whether one partner can bind the others to certain business decisions. In the case of a single partner being the decision-maker, the partners can collectively decide what decisions the partner can take and any other restrictions on the decision-making power.
- Dispute resolution
With several partners in the business, there will inevitably be conflicting views which may even lead to disputes. These matters may be managerial, commercial, or even legal. Hence, outlining a dispute resolution mechanism to follow is imperative. Once the process has been decided and included in the garment, the partners have the due process to turn to in case of any disputes that may arise.
- Exit and termination
The agreement should also detail the length and tenure for which the contract is valid. The agreement should also address the procedure to follow if a partner wishes to exit the partnership. Additionally, when the partnership is over, a proper termination protocol needs to be in place to address it. This will include the distribution of assets and finances and transfers of IP and other assets.
Do I Need an LLP Agreement?
Having an LLP agreement is not necessary, however, it is recommended to have one in place. A well-drafted and written LLP agreement offers more clarity and definition to the agreement between the partners and their respective roles. It can also help to avoid any clashes, confusions, and arguments in the future with a written document to turn to for reference. With all the provisions and clauses added in the contract, partners have a clear guide to follow in terms of managerial and commercial decisions.
Each state and region has relevant legislation that offers statutory provisions for partnership agreements in case there is none in place. However, these are general terms and may be unfavourable for your business and certain partners involved, especially in the case of an LLP.
Having a clear and well-written LLP agreement also benefits the business. The garment will be more in line with what you envision for your venture and all partners will be on the same page regarding the future of the business.
Key Takeaways
- Limited liability partnerships have general partners with unlimited liability and limited partners who have limited liability in the business.
- Limited partners have a passive role in the business, unlike the general partner, and cannot enter into binding contracts on behalf of the business.
- An LLP agreement sets out the obligations, financial contributions, and rewards of the partners as well as provisions regarding decision-making and dispute resolution.
- While not necessary, an LLP can help serve your business better by defining the way the partnership structure will contribute to the business.
A well-drafted agreement is key to avoiding business conflicts and achieving your business goals. Are you in the process of drafting one for your business? We advise getting in touch with our business lawyers to help you tackle the legalities and craft the right agreement for you. At Lazarus Legal, we are committed to working with you to help your business grow and expand. Connect with us today to find out how we can help you in your commercial endeavours.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.
