An LLP is different to a traditional partnership and is generally treated like a limited company; however, a number of differences remain and the regulatory and commercial landscape in which LLPs operate has evolved significantly in recent years.
In this insight we consider some things that should be borne in mind on a banking transaction involving an LLP in light of current law, regulatory developments and market practice.
For example, the LLP retains the tax structure similar to that of a traditional partnership and is governed by a partnership agreement entered into by each of the members. 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 LLP. 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. The following are key considerations for lenders when financing 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 (subject to any personal guarantees or other contractual arrangements). 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 and lenders will typically consider wider group support where the LLP forms part of a wider structure.
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 and whether any consents are required from members or specified classes of members. 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) and whether there are any restrictions on granting security over LLP assets or members’ interests.
Resolutions
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 (or such members as are required under the LLP agreement).
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 no 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.
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 land. Security which is capable of being registered and is granted by LLPs needs to be registered at Companies House and lenders should ensure that filings are made accurately and on time.
Regulatory and transparency considerations
As with companies, the regulatory environment for LLPs has evolved significantly in recent years, particularly following the Economic Crime and Corporate Transparency Act 2023. Lenders should expect increased scrutiny of LLP structures, including verification of the identity of members and persons with significant control, and greater emphasis on the accuracy and completeness of Companies House filings. These developments increase the importance of robust due diligence and ongoing compliance monitoring.
Due diligence and structure
In practice, lenders should also consider where value sits within an LLP structure, which may not always be at LLP level. In particular, value may sit in members’ capital accounts or within a wider group. This means that guarantees, security and covenant packages should be carefully structured to reflect the commercial reality of the borrower group.
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.