This is the second in our current series of blog posts giving top tips for lending to different types of borrower. In this post, Rachael Burton is looking at tips when lending to limited liability partnerships (LLPs).
An LLP is different to a traditional partnership and is generally treated like a limited company, however a number of differences exist. For example, the LLP retains the tax structure of a traditional partnership and is governed by a partnership agreement entered into by each of the partners. Further, LLPs do not distinguish between shareholders and directors meaning that the members of an LLP are responsible for the day to day decision making of the partnership. An LLP is therefore popular amongst those who wish to maintain the partnership structure whilst limiting their personal liability.
There are many reasons why an LLP may wish to borrow money, for example, to fund its day to day business expenses, to expand the business or to refinance existing debt. This post considers some things that should be borne in mind on a banking transaction involving an LLP.
- Limited liability
LLPs have a separate legal personality to the individuals within the partnership. This means that the LLP will enter into the loan agreement in its own name. Unlike traditional partnerships, the personal assets of individual members of the LLP are protected. They will generally only be liable for the debts of the LLP up to the amount of their contribution in it. If a lender wants members of an LLP to have personal liability then personal guarantees (with or without additional security) should be taken from the members.
- Partnership agreements
Unlike a company which is governed by its articles of association, members of an LLP are generally free to run their partnership as they see fit. However, most will have some form of partnership or member agreement in place. This will need to be checked for any restrictions on the powers of the LLP, such as its ability to borrow or grant security. In addition, the agreement will need to be checked to ensure that there aren’t any specific provisions concerning the approval of transactions or the execution of documents and deeds (such as who is permitted to sign, see below).
The way in which LLPs should hold meetings is not set out in statute. The default position is that all members are entitled to be involved in the management of the LLP. A simple majority of members can agree ordinary business but a change to the nature of the business requires unanimity. However, as stated above, partnership agreements or other documents may include restrictions on the ability of the LLP to do certain things or outline the manner in which it can enter into certain transactions. Lenders will therefore often request a resolution of all the members confirming their agreement to the proposed transaction and entry into the various transaction documents by the LLP.
If the partnership agreement delegates powers to certain members or groups of members or, conversely, specifically requires all member approval, then resolutions should reflect this. Further, while there are not statutory requirements for members to declare interests in transactions (as there are for company directors), the partnership agreement may contain rules on this.
- Execute documents in the name of the LLP
Documents must be executed in the name of the LLP rather than in the names of the individual members. This is done in much the same way as execution of documents by a company. Although seals can in theory be used, usually contracts, such as loan agreements, are signed on behalf of the LLP by an authorised signatory – this will usually be a member of the LLP. Deeds (which security documents will almost always be) will usually be signed by two members of the LLP or a single member in front of a witness. Again, the membership agreement should be checked to verify this.
- Granting security
An LLP can grant security over its assets in its own name. Unlike traditional partnerships that cannot generally grant floating charges, LLPs are capable of granting both floating and fixed charges. Floating charges are useful where the borrower has assets that are regularly changing, for example stock or equipment used by the business. In addition, a qualifying floating charge allows the holder to make an out of court appointment of an administrator. Fixed charges are granted over more permanent, identifiable assets, such as buildings or intellectual property. Security which is capable of being registered and is granted by LLPs needs to be registered at Companies House.
As the above highlights, whilst LLPs are governed by statute and much of the legislation mirrors that applicable to companies, partnership agreements can vary greatly and have a significant impact on the dealings of the LLP. In every transaction a review of the terms of the partnership agreement is a good place to start. They are not public documents so a certified copy should be requested early on in the transaction.
For further information, please contact:
Joanna Belmonte, senior associate and PSL, Banking and Finance
T: 0161 836 7809
Rachael Burton, trainee solicitor, Banking and Finance
T: 0207 653 1615