Are you considering registering a limited liability partnership (LLP) but feel unsure of its main characteristics? An LLP is an incorporated company with two or more partners, known as LLP members. It’s different from a general partnership because the member’s liability for business debts is limited, and because it’s incorporated and has a separate legal personality. There are two types of LLP members: ordinary and designated. In this guide, we explore the difference between the two. Ordinary members share ownership and management responsibilities, while designated members have extra administrative and legal duties. We discuss how to assign or change member status and the importance of a formal LLP agreement.
Key takeaways
- LLP members are individuals or corporate entities that jointly own and run a limited liability partnership for profit-making purposes.
- Designated LLP members have additional statutory, administrative and management duties.
- Designated LLP members are legally accountable for fulfilling their duties.
What’s an LLP member?
LLP members, also known as partners, jointly own and run a limited liability partnership (LLP), sharing its capital and profits or losses. This membership model makes an LLP different from a limited company: unlike a limited company, an LLP doesn’t have shareholders, directors or guarantors.
- A guide to limited partnerships
- How is a limited liability partnership formed?
- Distributing profits in a limited liability partnership (LLP)
Either an individual or a corporate entity can be an LLP member. You must have a minimum of two designated members to set up and run an LLP. If the LLP is being wound up, its members may be liable to contribute to the partnership’s assets, depending on what they have agreed to with the other members.
LLPs don’t pay Corporation Tax. Instead, each LLP member is usually required to complete a Self Assessment tax return.
What’s the difference between LLP members and designated members?
There are two types of LLP members: ordinary and designated. A designated LLP member has additional management and legal administration duties.
Differences between LLP members and designated members
| Ordinary member | Designated member |
|---|---|
| Can be an individual or a corporate entity | Can be an individual or a corporate entity |
| Shares the profits or losses and capital of the partnership | Shares the profits or losses and capital of the partnership |
| Can usually take on a management role, which can be extensive | Has additional management and legal administration duties |
| Must show duty of care and fulfill their fiduciary duties, and those set out in the LLP agreement when conducting LLP business | Legally accountable for carrying out their additional duties. Could face penalties for not fulfilling those duties |
Responsibilities of ordinary LLP members explained
Ordinary members have fiduciary duties to their LLP and can take on general management responsibilities. They must also show a duty of care when entering into transactions on behalf of the LLP. This covers:
- Carrying out the LLP’s instructions
- Exercising appropriate care and skill
- Behaving honestly and declining inducements or personal profits in respect of the LLP’s business
- Not allowing any conflicts of interest
Day-to-day operational responsibilities
Both ordinary and designated members can also be granted additional management powers. These may include:
- Overseeing daily operations
- Dealing with suppliers and key stakeholders
- Ensuring all members adhere to the terms of the partnership agreement
- Registering the partnership for Self Assessment
- Maintaining accounting records, financial documentation, and other LLP paperwork
- Signing contracts and other documents on behalf of the LLP
- Ensuring the business complies with data protection rules
- Arranging and maintaining relevant insurance policies (e.g. Employers’ Liability, Public Liability, Professional Indemnity)
- If the LLP has employees:
- Registering for VAT and PAYE (where applicable)
- Submitting VAT returns and paying VAT bills
- Ensuring all PAYE tasks are completed
It’s common for all LLP members to participate in managing the business, usually based on their expertise and contributions. Members can allocate duties amongst themselves and outline them in their partnership agreement. An LLP or partnership agreement governs how your partnership is run. Once it’s agreed and signed by all members, it’s legally binding.
Key legal and administrative duties of designated LLP members
A designated member’s role is to ensure the LLP and its members comply with their statutory requirements. These are set out in the following legislation:
- The Limited Liability Partnership Act 2000
- The Limited Liability Partnership Regulations 2001
- Other legislation and regulations relevant to the business.
Designated members are legally accountable if they fail to fulfil their statutory obligations.
LLP designated member responsibilities
In addition to their general management responsibilities and fiduciary duties, designated LLP members have the following statutory and administrative duties:
- Maintaining the LLP’s registered office address, signage, and official stationery
- Appointing an accountant and an auditor
- Preparing, signing, and filing annual accounts with Companies House
- Preparing and filing an annual confirmation statement
- Submitting an annual Partnership Tax Return with HMRC
- Notifying Companies House of any changes to the LLP’s registered details, including details of members
- Acting on behalf of the partnership upon its winding up or dissolution
Who can become a designated or ordinary LLP member?
If you want to be an ordinary LLP member or a designated LLP member, the other members must agree to your appointment. You can’t be an LLP member if you are:
- Disqualified from acting as an LLP member or a company director
- An undischarged bankrupt
In some cases, the court may grant special dispensation to allow a disqualified person or an undischarged bankrupt to act as an LLP member or take part in the management of an LLP.
Corporate bodies, such as limited companies and other LLPs, can also be appointed as ordinary or designated LLP members, known as ‘corporate members’.
How to appoint or remove designated LLP members
By law, an LLP must appoint at least two designated members. If an LLP only has two members, both members will be designated.
If an LLP fails to identify at least two designated members (or the number falls below two), Companies House will automatically consider all members to be designated.
You can appoint designated members of your LLP during and after incorporation. You can also change your members’ status at any time.
During LLP incorporation
If you’re appointing a designated member during the LLP incorporation process, you must indicate their consent on the LLP incorporation Form (Companies House Form LL IN01).
You can also make all your LLP members designated members during incorporation by selecting ‘Yes’ when asked, ‘Will all members from time to time be designated members?’
After incorporation
You can use Form LL AP01 (or LL AP02 for a corporate member) after incorporation to appoint a new ordinary or designated LLP member. You may need to get the agreement of all your existing members before appointing a new member. If you have an LLP agreement, you should check the appointment procedure before proceeding.
The Form must be filed with Companies House online or by post within 14 days of the new member’s appointment.
How to change a member’s status in a limited liability partnership
If you make one of your ordinary LLP members a designated member, or vice versa, you must file Form LL CH01 (or Form LL CH02 for a corporate member) with Companies House within 14 days of the change.
If you change from every member being a designated member to only certain members being designated members, or vice versa, you must complete Companies House Form LL DE01.
You can’t use Form LL DE01 to change the designation of specific members. If you need to do this, you’ll need to file either Form LL CH01 or Form LL CH02 alongside Form LL DE01.
Why do I need an LLP agreement?
The LLP Act 2000 and the LLP Regulations 2001 outline the default rights, duties, and responsibilities of LLP members.
It’s good practice, however, to put in place a written LLP agreement before setting up your partnership. An LLP agreement outlines how your partnership must operate. It becomes legally binding when it’s agreed and signed by all your partnership’s members. An LLP agreement is beneficial when individual members have different rights and duties.
You can create your own LLP agreement, but it’s often best to consult a solicitor for specialist help and tailored advice.
What’s included in an LLP agreement?
An LPP agreement usually outlines the following aspects of running a partnership:
- Rights and duties of all members
- Rights, duties, and responsibilities of designated members
- Defined roles and specified rights of individual members. This can help to clarify each member’s duties, areas of expertise, and seniority.
- Each member’s investment contribution
- Distribution of profits (or losses) and capital
- Decision-making rules and procedures
- Membership requirements
- Procedures for the appointment, resignation, and retirement of members
- Dispute resolution procedures
- What should happen in the event of any member’s incapacitation or death
What happens without an LLP agreement?
If you don’t have a written or verbal partnership agreement, the default provisions under Regulations 7 and 8 of the Limited Liability Partnership Regulations 2001 will govern how your partnership is run.
Under these rules, all your LLP’s members will be treated equally. You may find this isn’t appropriate for your partnership or reflects the contributions of each of its members.
The default provisions include the following:
- All LLP members are entitled to share equally in the profits and capital of the limited liability partnership
- Every member may participate in the management of the partnership
- No person may become a member without the consent of all existing members
- A majority of members may make decisions on ordinary matters, but the consent of all members is required to make changes to the nature of the business
- A majority of members cannot expel a member unless all members have granted the power to do so
The default provisions may be suitable for some small LLPs where all members are equal. However, most larger LLPs benefit from having a tailored LLP agreement.
How to register a limited liability partnership online
Before you register your LLP, make sure you have a minimum of two designated members. If you have more than two members, ensure at least two of them are designated members. Once your partnership is incorporated, you should put in place an LLP agreement to clarify the responsibilities of each designated member and how any disagreements will be handled. If circumstances change, you can always change the status of your members after incorporation and update Companies House using Form LL CH01.
You can set up your LLP online with Companies House, or you can use the Quality Company Formations Limited Liability Partnership Package. As part of the package, you’ll receive a draft LLP Agreement.
Join The Discussion