Partnership/LLP agreements-reduce risk

An unsigned partnership or LLP agreement may not be a problem when all is harmonious but, if the unexpected happens, a lack of signature can make things very difficult.

They say cobblers’ children are the worst shod and it’s not uncommon to find partnerships, including law firms, whose partnership or LLP agreements remain unsigned or don’t reflect the latest developments.

Many LLP agreements specify the automatic division of profit but we advise adopting a belt and braces approach by making a formal, written resolution to:

(a) approve the final, audited(/unaudited) financial statements; and

(b) allocate the firm’s profits for the period ended [DD/MM/YYYY] in accordance with the signed members’ agreement.

We think this is necessary because unless profits are formally allocated, they can remain part of the general reserves of the LLP and rank subordinate to other creditors in the event of a winding up.

If profits have not been formally allocated, members could be drawing against money that did not actually belong to them. As a result, where drawings are made against cumulative profits held by the LLP the drawings could constitute a loan from the LLP and repayment could be demanded in a winding up,. You could, therefore,go so far as to formalise your firm’s periodic (often monthly or quarterly) drawings arrangements by specifying that they are being made against previously agreed and allocated profits.

Bringing some formality to proceedings is a very simple step to take and one that you might well wish you’d taken should the worst happen.