Salaried Members: Condition B: Change in circumstances
The test for Condition B needs to be revisited if the circumstances change
This looks at an example of an LLP controlled by its founders and the transfer to a new generation. This results in a change in their remuneration structure and their ability to influence the firm’s affairs.
C LLP was founded by two individuals, A & B. A & B are entitled to the residual profits, make all the major decisions and they have invested all but a nominal amount of the capital.
The other members receive a fixed monthly sum plus an annual discretionary bonus, typically 20% to 30% of their annual fixed compensation.
The other members are all Salaried Members, satisfying Conditions A, B & C. Whilst the bonus is sometimes more than 20% of the reward package, this is set without reference to the profits of the firm but is instead based wholly on their own fixed compensation. In addition, the individuals have no real influence and no capital contribution.
After a while, as had been the intention, C & D, two of the junior members, start to take on elements of the work done by A & B.
As their terms have changed, the test needs to be applied again to C & D.
C & D will receive a lower monthly sum, and instead will receive a share of the profits. A reasonable estimate is that about 25 to 30% of their reward package will be in the form of a profit share. They will also take part in all major decisions.
C & D have sacrificed an entitlement to salary in exchange for the opportunity to participate in the business in much the same way as A & B the senior members, even if as junior members they are substantially rewarded by a fixed profit share.
Conditions A and B are no longer met so C & D are no longer Salaried Members.