When LLP Members No Longer Want to Work Together: The Options Explained

Considering an LLP member exit or facing a dispute between LLP members? Learn about retirement, expulsion, restructuring, business sales and winding up.

A Limited liability partnership (“LLP”) offers a flexible and tax-transparent structure that suits many professional and owner-managed businesses. Unlike a limited company, an LLP does not issue shares as its members hold interests governed principally by an LLP agreement. The rules on separation are materially different as a result.

When LLP members decide they no longer wish to work together, the starting point is almost always the LLP agreement. Understanding what that agreement says, and what happens in its absence, is essential before any separation can be planned.

This article considers LLPs incorporated in England and Wales. 

Start With the LLP Agreement

The LLP agreement is the single most important document in any member separation. Unlike a company constitution, which has a public element at Companies House, an LLP agreement is a private contract between the members and can be structured almost entirely as the parties choose.

A well-drafted LLP agreement will typically set out: 

• how a member may retire or be expelled and on what notice; 
• how the departing member’s capital account and accrued profit share are calculated and repaid;
• any valuation mechanism for goodwill or other intangible assets;
• what restrictions (for example, non-solicitation or non-competition clauses) apply after departure; and
• what happens in the event of a deadlock between members.

Where there is no written LLP agreement, default rules apply under legislation and associated regulations. Those defaults are often unsatisfactory, for example treating all members as sharing equally in capital and profits regardless of their actual contribution. Therefore, understanding what process applies (either through the LLP agreement or legislation) is the essential first step for any member considering separation.

Option 1: Retirement or Voluntary Exit of a Member

The most common form of separation is for one or more members to retire or resign from the LLP while it continues to trade. Where the LLP agreement contains a retirement mechanism that process should be followed precisely.

This will typically involve:

• the member giving the required notice of their intention to retire;
• a calculation of their current capital account balance and accrued profit entitlement;
• any buy-out or deferred payment arrangement for goodwill; 
• updating the LLP’s membership details at Companies House by filing a notification of the change in membership; and
• any agreed post-departure restrictions taking effect.

A valuation of the departing member’s interest (particularly where goodwill, a book of business or a client portfolio is involved) is frequently the most contentious aspect of any LLP separation. A pre-agreed valuation methodology in the LLP agreement, or an independent expert determination clause, provides the best protection against a costly dispute. If there is no LLP agreement, the partis can seek to agree the value themselves or seek to jointly appoint an independent expert to carry out the valuation.

Option 2: Expulsion or Compulsory Exit of a Member

A well-crafted LLP agreement would contain provisions governing the compulsory removal or expulsion of a member in defined circumstances (typically serious misconduct, breach of the agreement, regulatory sanction, or insolvency). If well drafted, the agreement will usually set out the process to be followed, the notice required, and the basis on which the expelled member’s interest is valued and paid out.

Where no such provision exists, compelling a member to leave against their will is legally difficult. An LLP cannot simply remove a member without the contractual right to do so, and attempting to do so may itself give rise to a claim.

Option 3: Restructuring and Variation of Membership

Where the LLP continues but its membership structure needs to change (for example, where new members are admitted, profit shares are redistributed, or part of the business is transferred to a new entity) this can generally be achieved by agreement between the members, with the LLP agreement amended accordingly.

As with limited companies, restructurings that involve transferring a business between entities will have tax consequences for the LLP and for the individual members, and specialist tax advice should be taken on the structure before any steps are implemented.

Option 4: Sale of the LLP’s Business

If the members wish to bring the LLP’s activities to an end rather than continue under a changed membership structure, a sale of the LLP’s business and assets to a third party (or a management buy-out by one or more of the existing members) is another option. The proceeds are then divided between the members in accordance with the LLP agreement or, in its absence, the applicable default rules.

Option 5: Dissolution and Winding-Up

Where the members agree that the LLP should cease trading and be wound up, or where no other route is feasible, the LLP may need to be dissolved.

Solvent winding-up (members’ voluntary liquidation) 

A solvent LLP can be wound up through a members’ voluntary liquidation process, distributing the surplus assets to members after all creditors have been paid in full. The insolvency procedures applicable to companies are applied to LLPs with modifications under the relevant regulations. This can be a tax-efficient route to extracting value, but the tax treatment depends on the circumstances and specialist advice should be taken.

Insolvent winding-up

Where the LLP cannot pay its debts, the insolvency procedures applicable to companies under the Insolvency Act 1986 (applied with modifications to LLPs under the Limited Liability Partnerships Act 2000 and associated regulations) will become relevant. This is outside the scope of this overview, and specialist insolvency advice should be sought promptly in any situation where solvency is in doubt.

A Note on Tax

LLPs are generally tax-transparent for income and capital gains tax purposes, meaning members are taxed directly on their share of the LLP’s profits and gains rather than the LLP being taxed as a separate entity. However, the tax consequences of any member exit, capital withdrawal, restructuring or dissolution still require careful planning.

The tax position on any LLP separation depends on the specific facts, including the nature of the LLP’s assets, the method of exit and how payments to departing members are structured. 

Independent tax or accountancy advice should always be taken, and where a restructuring involves transferring a business or assets to a new entity, HMRC clearance may also be appropriate depending on the route.

What Happens if LLP Members Cannot Agree on an Exit?

If the relationship between members breaks down and there is no contractual mechanism to resolve matters, the options narrow considerably. As LLP governance is usually entirely contractual, the absence of a well-drafted LLP agreement leaves members with limited statutory protections compared with company shareholders.

If an agreement on an exit cannot be reached then the parties should consider: 

• negotiation and mediation at an early stage. This process tends to be faster, less costly and less damaging to the LLP’s business and client relationships than litigation.
• breach of contract claims. Where one member acts in breach of the LLP agreement (for example by competing with the LLP, misappropriating client relationships, or failing to comply with a retirement or expulsion process) the other members may have a contractual remedy including damages or injunctive relief.
• unfair prejudice and. The unfair prejudice provisions of the Companies Act 2006 (section 994) are applied to LLPs with modifications under the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009, giving members a degree of protection similar to that available to company shareholders. The right to bring an unfair-prejudice petition can, however, be excluded by a unanimous written agreement between the members, so the LLP agreement should be reviewed carefully before reliance is placed on that remedy. 
• just and equitable winding-up. The just and equitable winding-up ground under section 122(1)(g) of the Insolvency Act 1986 is available for LLPs (with modifications via the Limited Liability Partnerships Regulations 2001), giving a court power to wind up an LLP where it is just and equitable to do so. As with companies, this is a remedy of last resort.

Taking early legal advice about the rights available under the LLP agreement and the statutory position is important before any dispute escalates.

How Jonathan Lea Network Can Help

At Jonathan Lea Network, we advise LLP members on retirement and exit, on varying and restructuring membership arrangements, and on resolving disputes where relationships have broken down. Whether the situation is amicable or contentious, our team can review your LLP agreement (if available), explain the options available, and guide you through the process.

We work alongside specialist tax advisers to ensure that any separation is planned with the tax position properly in mind, and we are experienced in handling both collaborative restructurings and contested member exits.

We provide most enquiries with an indicative scope of work and fee estimate, based on the information you share. We aim to respond within one working day.

In the same email, you will be invited to arrange a 20-minute complimentary, no-obligation video consultation, should the proposed scope of work and fee estimate be of interest. This initial discussion is designed to help us better understand your requirements, refine the scope of work and ensure our approach is fully aligned with your objectives.Following the call, we will email you a definitive, formal fee estimate for you to consider and approve.

Where you would prefer to receive initial advice and guidance from the outset, or where a short introductory call would not be the most appropriate starting point, we may instead recommend a 2.5-hour fixed-fee appointment, starting from £750 + VAT. This enables us to review the information you provide, discuss your situation with you and provide considered, tailored advice at an early stage.

To make an enquiry, please email us at wewillhelp@jonathanlea.net, complete our contact form, or call us on 01444 708640.

VAT is charged at 20%.

This article is a general overview and is not legal or tax advice. The options available will depend on the LLP agreement and the particular facts of the matter. 

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.