Private Equity Club

Limited Liability
Partnerships
(LLPs )
Tuesday 6th September 2005

connectedthinking*

PwC

Private Equity Club

Limited Liability
Partnerships
(LLPs )
John Wayman
Senior Partner
PricewaterhouseCoopers LLP

connectedthinking*

PwC

UK Limited Liability Partnerships (LLPs)

Why use an LLP?

How do LLPs fit into the BVCA Model Structure
Ideal scenario new PE House
Less than ideal scenario conversion of existing PE House

Private Equity Club

PricewaterhouseCoopers

Page 3

Why use an LLP?

Natural fit for a typical PE/VC House

Culture = Partnership
Business Essential = Limited Liability
No employment = No employment related securities
Potentially significant income tax exposure on carried
interest avoided
Bonus saving of 12.8% NIC on salary/bonuses

Private Equity Club

PricewaterhouseCoopers

Page 4

Private Equity Funds

BVCA Model Structure
Partners/
Principals
LPs

SLP

Holdco
LP

Carried
Interests

GP

Investors

Manager
Co
FSA Reg

GP Co
Advisor
Fee
Deal Fees

Private Equity Club

PricewaterhouseCoopers

GP
Management
Fee (PPS)

Fund
(ELP)

LPs

Portfolio Companies
Page 5

Private Equity Funds

BVCA Model Structure LLP Variant
Partners/
Principals
LPs

LLP Members
(ie partners)

SLP

Manager
UK LLP
LP

Carried
Interests

GP
Advisor
Fee

Investors
GP Co

Deal Fees
Private Equity Club
PricewaterhouseCoopers

GP
Management
Fee (PPS)

Fund
(ELP)

LPs

Portfolio Companies
Page 6

LLP Conversion
Migration from Manager Co to LLP

Partners/
Principals

Manager
UK LLP

Holdco

Manager Co

Private Equity Club

PricewaterhouseCoopers

GP Co

GP Investment Management agreement

Employees
Fixed assets/other assets/contracts
Property lease
Page 7

LLP Conversion
Migration from Manager Co to LLP

Partners/
Principals

Manager
UK LLP

Holdco

Manager Co

Private Equity Club

PricewaterhouseCoopers

GP Co

GP Investment Management agreement

Employees
Fixed assets/other assets/contracts
Property lease
Page 8

LLP Conversion
Migration from Manager Co to LLP

Partners/
Principals

Manager
UK LLP

Holdco

Manager Co

GP Co

GOODWILL??

Private Equity Club

PricewaterhouseCoopers

Page 9

LLP Conversion
Migration from Manager Co to LLP

Partners/
Principals

Members

Holdco

Manager Co
Member

GP Co

Avoid corporation tax charge

Manager
LLP
Valuable
goodwill

Private Equity Club

PricewaterhouseCoopers

Page 10

10

LLP Conversion
Migration from Manager Co to LLP

Partners/
Principals

Members

Holdco

Manager Co
Member

Manager
LLP
Valuable
goodwill

Private Equity Club

PricewaterhouseCoopers

GP Co

Avoid corporation tax charge

But impact on protection from
employment related securities
rules?
Page 11

11

LLP Conversion
Impact on Employment Related Securities Exposure
Key Issue for PE House Principals
Exposure to income tax/NIC on part of carried interest
40% tax/12.8% employer NIC
MOU
Limited protection
Reallocation of forfeited carry
New PE/VC House
No employment = No ERS

Private Equity Club

PricewaterhouseCoopers

Page 12

12

Private Equity Funds

BVCA Model Structure LLP Variant
New PE/VC House

Partners/
Principals
LPs

LLP Members

SLP

Manager
UK LLP

LP
GP

GP Co

GP

Fund
(ELP)

Investors
LPs

Portfolio Companies
Private Equity Club
PricewaterhouseCoopers

Page 13

13

LLP Conversion
Impact of Employment Related Securities Exposure
New PE/VC Houses
No employment = No ERS
Existing PE/VC Houses
New joiners = no employment = no ERS
Existing Executives continued ERS risk
Pre LLP Funds
Reallocations of forfeited carry
Post LLP funds
Connected former employer issue
Private Equity Club
PricewaterhouseCoopers

Page 14

14

LLP Conversion
Migration from Manager Co to LLP

Partners/
Principals

Members

Holdco

Manager Co

GP Co

Member

Manager
LLP

Private Equity Club

PricewaterhouseCoopers

Page 15

15

LLP Conversion
Other Practical Aspects
Tax (Other)
Tax reporting for individual partners
Partner education
Drawings v Salary
Tax reserves
Registering as self employed
Tax/NICs
VAT registration/VAT grouping

Private Equity Club

PricewaterhouseCoopers

Page 16

16

LLP Conversion
Other Practical Aspects
Accounting
Format of LLP Accounts
Goodwill
Regulatory
FSA approval for LLP
Change of Entity Fast Track for conversions
3-6 months
Capital requirement of LLP
Financial Projections
Private Equity Club
PricewaterhouseCoopers

Page 17

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LLP Conversion
Other Practical Aspects
Legal
Impact on Fund Agreement Terms
Change of manager entity
Termination of employment of key persons
Investor consent
Detailed terms of LLP Agreement

Private Equity Club

PricewaterhouseCoopers

Page 18

18

Table Discussion
LLP Conversion

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

19

LLP Conversion
Discussion

Tax (Other)
Tax reporting for individual partners
Partner education
Drawings v Salary
Tax reserves
Registering as self employed
Tax/NICs
VAT registration/VAT grouping

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

20

LLP Conversion
Discussion

Accounting
Format of LLP Accounts
Need to comply with LLP SORP
Goodwill
Transfer to LLP

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

21

LLP Conversion
Discussion

Regulatory
FSA approval for LLP
Change of Entity Fast Track for conversions
3-6 months
Capital requirement of LLP
Financial Projections

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

22

LLP Conversion
Discussion

Regulatory
Considerations
FSMA requires that a new firm requires a new authorisation
FSA has developed a Simple Change of Entity process to

facilitate LLP conversions

Effectively a cut down FSA application but subjects to
limitations of use
Revised this June
FSA typically take 2-3 months to consider
Application fee usually 5,000

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

23

LLP Conversion
Discussion

Regulatory
Limitations on the Simple Change of Entity approach
Firm must:
Carry on regulated activities of existing firm
Have no outstanding regulatory obligations
Risk profile of business unchanged
No business scope changes
Regulatory rights and obligations transfer
Continuation of compliance arrangements and client asset
obligations
Limited changes to the Approved Persons
2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

24

LLP Conversion
Discussion

Regulatory
Issues
Need to apply to transfer any existing FSMA waivers
New waivers may be needed to facilitate client transfers
Compliance arrangements need to be up to date and

available for inspection-FSA may sample

Financial projections need to be submitted
FSA may revisit scope of permissions
Need for a delay in the authorisation to meet business needs

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

25

LLP Conversion
Discussion

Legal
Impact on Fund Agreement Terms
Change of manager entity
Termination of employment of key persons
Investor consent
Detailed terms of LLP Agreement

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

26

LLP Conversion
Discussion

Legal
Benefits of Corporate Form
Governed by the LLP Act 2000 and the LLP Regulations
LLP has a separate legal personality (body corporate)
Two or more members can be individuals or body
corporate
Can obtain FSA authorisation
Limited liability for members
LLP Agreement Flexibility to meet commercial needs
2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

27

LLP Conversion
Discussion

Legal
Liabilities
An LLP is liable for contracts entered into - same as a Ltd
Co
Members liable to contribute to LLPs assets as provided
in LLP agreement (absent intention to defraud creditors)
Members liable for fraudulent/wrongful trading
Clawback by liquidator prior 2 years
Members personal liability for negligence same as Ltd
Co
2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

28

LLP Conversion
Discussion

Legal
Members Remuneration
How to share profits / losses
Flexibility - drawings, loans, distributions (cash or in kind)
Ability to segregate/designate income streams
LLP Conversions
Business Transfer issues
Valuation of assets
TUPE
2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

29

LLP Conversion

Discussion Overview

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

30

LLP Conversion

Thank You

2004 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.

PwC

31