Protection For LLPs And Their Members
LLPs get treated as though they were companies for some purposes and partnerships for others, and protection is one of the places that distinction bites.
Members have limited liability, which is the point of the structure and a genuine advantage over a general partnership. But they are generally taxed as self-employed individuals and are not usually employees of the LLP.
That one fact decides quite a lot about what can be arranged and who can pay for it.
The short answer
An LLP sits between a partnership and a company, and the practical consequence for protection is that members are usually self-employed rather than employees. That generally rules out cover that depends on an employer and employee relationship, and it means a member's capital account and share are dealt with by the LLP agreement rather than by company law, so what happens on a death depends on what that agreement says.
What this changes
- Members are generally self-employed rather than employees of the LLP
- Cover that depends on an employer and employee relationship is generally not available to members
- There is no company sick pay, because there is no employment to attach it to
- A member's capital account and profit share are dealt with by the LLP agreement
- What happens to a departing or deceased member's share depends on that agreement
- Employees of the LLP are in a different position from members, and are employees in the normal way
The bit people miss
The relevant life point is the one that surprises people. Relevant life cover is popular with company directors because the company pays the premiums and the director is an employee of their own company, which is what makes it work. LLP members are generally not employees, so it is usually not available to them, and members who have heard about it from a friend with a limited company are often disappointed. That does not leave members without options, it just means the options are personal policies and arrangements made through the LLP agreement rather than the company-paid route. Worth confirming for your own arrangement rather than assuming either way.
What Your LLP Agreement Says Is The Whole Answer
An LLP is governed by its members' agreement to a far greater extent than a company is governed by its articles, which makes that document unusually important here.
It normally sets out what happens to a member's capital account if they die or leave, whether the remaining members buy the share and how it is valued, what happens to undrawn profits, and whether there is any obligation to pay anything to a family. Those provisions vary enormously between LLPs because they were negotiated rather than inherited from a template.
So the honest starting point is to read it. If it says the remaining members must buy out a deceased member's interest, there is a funding requirement and that is what insurance is for. If it says nothing, or says the interest simply passes to the estate, that is a different and usually worse problem, because the LLP can find itself with an unexpected obligation or a family with an interest nobody can turn into money.
Members And Employees Are Not The Same People
This distinction matters when an LLP starts arranging cover, because it is easy to apply one answer to everybody.
People employed by the LLP are employees in the ordinary way. The LLP can provide them with benefits, and arrangements that depend on an employer and employee relationship generally work for them. Members are in the other category, and the same arrangement generally does not extend to the members themselves.
The practical effect is that an LLP often ends up with two sets of arrangements: benefits for staff, and personal policies plus agreement-funded cover for the members. That is not a problem, it is just worth setting up knowingly rather than discovering halfway through that the structure does not permit what was planned. Because the tax treatment of all of this depends on how the LLP and the individual are taxed, it is worth confirming with your accountant alongside arranging the cover.
What usually fits, and why
Usually the first priority, because there is no employer and therefore no sick pay. A member unable to work through illness has their profit share affected and nothing paying them in the meantime.
Normally arranged as personal policies by each member, since the company-paid route generally is not open. Each member's own family position is separate from what the LLP agreement provides.
Pays a lump sum on diagnosis. Relevant because a serious illness can take a member out of the business for a long period while their share of the work still needs covering.
Common questions
Can LLP members have relevant life cover?+
Generally not, because it depends on an employer and employee relationship and LLP members are usually self-employed rather than employees. It is a common point of confusion, since members hear about it from friends who are company directors. Worth confirming your own position, but the usual answer is no.
What happens to a member's share if they die?+
It depends on the LLP agreement, which governs this far more than general law does. The agreement may require remaining members to buy the interest, may set out how it is valued, or may say very little. Reading it is the only way to know, and what it says determines whether cover is needed and for how much.
Do LLP members get sick pay?+
No, because there is no employment relationship to provide it. A member who cannot work through illness has no employer paying them, which is why income protection tends to be the first thing worth arranging for members rather than an afterthought.
Is an LLP the same as a partnership for protection purposes?+
Not quite. The limited liability is a real difference, and the way interests and capital accounts are handled is usually more formally documented. The similarity is that members, like partners, are generally self-employed rather than employees, so the same restrictions on employer-based arrangements tend to apply.
Can the LLP pay for members' cover?+
How that is treated depends on the tax position of the LLP and the individual member, and it is genuinely a question for your accountant rather than a general answer. What we can do is arrange the cover and tell you what it costs, once you know how you want to pay for it.
Cover that often goes with this
The gaps we most often find sitting next to this one.