LLP Finance, Profit and Losses

The members finance an LLP by providing capital contributions (normally cash). They may also loan monies to the LLP to fund its activities. Please note that LLPs do not have share capital.

An LLP agreement typically sets-out detailed rules in respect of:

• How the LLP is going to be financed.
• How much the members will be obliged to invest.
• How and when these investments will be made (for example by quarterly cash instalments).
• Whether and in what circumstances the members will be required to contribute further capital if the LLP requires funds, in what proportions, how much and when.

Members are not entitled to interest on their investment unless the LLP agreement says otherwise. Members contributing more than their fair share of capital may require interest on at least part of their investment.

The default position is that all members are entitled to an equal share of an LLP’s profits. This applies to profits of both an income and capital nature.

In relation to losses, the LLP Act assumes that the LLP will bear its own losses as a separate legal entity.

Members often want to vary this default position. Individual members may want a larger or smaller share of profits, or different treatments for profits of a capital and income nature. This is common where some members have invested more money or time into the development of the LLPs business than others.

The members may also require an LLP agreement to allocate losses to individual members in particular proportions (although care is needed so as not to jeopardise the limited liability status of members when doing so).

Rules regarding how profits (and losses) will be calculated should always be included in an LLP agreement.

As with a general partnership, drawings are cash advances paid to members throughout the year against the anticipated profits of the LLP.

An LLP agreement should detail:

• Rules for drawings and their accounting treatment (in particular, how and when they can be made).
• How the anticipated profits will be calculated.
• The percentage of anticipated profits that can be drawn.
• What happens if the anticipated profits prove to be over or under estimated.

An LLP agreement will often control how the LLP’s bank accounts should be used, including rules relating to:

• How bank accounts of the LLP can be opened and closed.
• The circumstances in which the LLP can change its bankers.
• Which members have authority to sign cheques and make other payments.
• Setting appropriate limits on the payment authority of an individual member without seeking the approval of the other members.

It is important to establish whether property (intellectual property, real estate and other assets) used by the LLP belongs to an individual member or to the LLP itself. An LLP agreement will usually specify that all property used by the LLP is owned by the LLP, noting specific exclusions.