How are limited liability partnerships different from private limited companies?  - A quick guide for insolvency professionals.

It’s now 25 years since limited liability partnerships (LLPs) were introduced.  (6 April 2026 will mark their birthday.)  They have become a popular business structure, particularly for professional service firms.

In his latest Coffee Break Briefing, Insolvency expert, Malcom Niekirk discussed LLPs and how they are different in the insolvency process.

In case you missed it you can read a summary and watch the full video below...

Summary

What is an LLP?

An LLP can be thought of as a traditional partnership wrapped in a corporation.  Unlike a standard partnership, an LLP has its own legal identity, separate from the individuals who own and run it.  This means the LLP itself can:

• Own property
• Enter into contracts
• Bring or defend legal proceedings

When it comes to taxes, an LLP is treated like a partnership rather than a company. The individual members – not the LLP itself – are taxed on the profits of the business.

The main benefit for members of an LLP (over being partners in a partnership) is that they have limited liability.  This is intended to protect their personal assets if the business runs into difficulty.

What are the insolvency procedures for LLPs?

LLPs can use most of the same statutory insolvency procedures as companies. The main procedures are:

• Compulsory liquidations
• CVLs
• MVLs (and an LLP can use a s110 scheme to transfer its business to a limited company)
• Administrations
• LLPVAs (limited liability partnership voluntary arrangements; CVAs for LLPs)
• Receiverships
• Moratoria (ssA1-A55 IA’86)
• Restructuring plans (Part 26A CA’06)

How do the members of an LLP pass a special resolution?

They don’t.  This is one way an LLP differs from a company.

Instead, the members of the LLP ‘determine’ that it should be wound up.  The legislation does not explain exactly what this means.  But the members need to make a formal, binding decision, in accordance with the constitution of the LLP.  Start by checking who the members are. 

Remember, recent changes to the Companies Act mean that only those members whose identity is formally verified at Companies House can take part in the decision-making.  

This is being phased in, and will apply to all LLP members before the end of 2026.  For more information, refer to Malcolm Niekirk’s ‘coffee break briefing’ of 12 January 2026 here.

This could be a real problem.  Suppose the members of an LLP want to put it into voluntary liquidation.  Assume, for this example, there are five members, and its constitution needs all members to agree to the decision to wind it up.  Now, take the situation where three of the members have verified their identity at Companies House, but the other two have not.  The unverified members cannot lawfully act as members and so cannot be part of the decision to wind up the LLP.  But, unless they take part, and agree, this LLP’s constitution will not allow the members to ‘determine’ that it should be wound up.

It may be possible to make the necessary decision on the basis of the unverified members formally abstaining, but, as individuals (and not members of the LLP), confirming that they will not object if the LLP and its other members treat the agreement of all the other members as good enough.

Always check the LLP’s rule book.  In particular, look for:

• The majority required for key decisions
• How many votes each member has
• How LLP meetings are called
• The notice period required
• How the LLP should give notice

When the LLP agreement is unclear or silent, it takes a unanimous agreement from all members to put it into voluntary liquidation or administration.  (This is different from a company.  A company needs a special resolution – 75% of those voting – to put it into voluntary liquidation.  A company needs only an ordinary resolution – a simple majority of its members voting – to put it into administration.  Alternatively, a company can go into administration on the basis of only a board resolution.)

Who signs the declaration of solvency for an LLP going into an MVL?

The declaration of solvency must be signed by a majority of the ‘designated members’.  (‘Designated members’ have specific, statutory management duties.)

An LLP must have at least two designated members, although all members can be designated if the LLP chooses. Where there is any doubt about who is a designated member, treat all members as designated members, and get all to sign the declaration of solvency.  That way you can be sure that a majority of the designated members have signed, even if nobody knows who they are.

What happens with overdrawn loan accounts during insolvency?

Call them in. Any overdrawn members’ loan accounts are treated as debts owed to the LLP and should be repaid.

Members’ profit shares are credited to their loan accounts.  Drawings are taken against those balances.  If a member draws more than they are entitled to, the account becomes overdrawn.

If the LLP agreement is properly drafted, trading losses are not deducted from a member’s current account.  (This is an important difference between a partnership and an LLP.)  In cases where the LLP agreement does allocate trading losses to its members, it may take away the members’ limited liability.  It may make the members personally liable for making good all the LLP’s debts. 

There is also section 214A Insolvency Act’16, which can compel a member to compensate the LLP.  It applies in cases where a member drew money from the LLP in the last two years before an insolvent liquidation, but only if the member knew that the LLP was cash-flow or balance-sheet insolvent at that time.

Who pays the capital gains tax when a bust LLP sells assets?

Who pays the capital gains tax (CGT) when a bust LLP sells its assets depends on whether the LLP is in liquidation or administration. 

Liquidation

When the LLP is in liquidation, tax transparency is destroyed.  This means the LLP becomes a corporation for tax purposes.

This means the LLP – not its members – will normally be taxed on the liquidation's profits or capital gains (if any).

Administration

When the LLP is in administration, tax transparency survives.  The LLP normally remains invisible for tax purposes.

The members, therefore, are at risk of having to pay income tax and CGT on the administration's profits and capital gains (if any).

Make sure you tell the members to get their own advice on their personal tax risk when working with them pre-administration or pre-liquidation.