Members’ interests in an LLP: debt or equity

An LLP’s balance sheet splits what it owes its members into “Loans and other debts due to members”, which are liabilities, and “Members’ other interests”, which are equity. Whether members’ capital and undivided profits sit in one or the other depends on the terms of the members’ agreement, tested against FRS 102 Section 22: if the LLP cannot avoid paying the member, the amount is debt.

What counts as members’ interests in LLP accounts?

The LLP accounts regulations prescribe two separate headings. In the balance sheet formats in Schedule 1 to the Large and Medium sized Limited Liability Partnerships (Accounts) Regulations 2008 (SI 2008/1913), and the equivalent small LLP regulations (SI 2008/1912), the headings are:

• Loans and other debts due to members. Note (10) to the formats requires three amounts to be shown separately: money advanced to the LLP by members by way of loan, money owed to members in respect of profits, and any other amounts.
• Members’ other interests. This is split into members’ capital, revaluation reserve, and other reserves (including the fair value reserve).

The headings mirror the company distinction between creditors and shareholders’ funds, but members are both investors and, often, the people doing the work, so the same pound of capital can be debt in one LLP and equity in another. The Statement of Recommended Practice, Accounting by Limited Liability Partnerships (the LLP SORP), tells preparers how to decide.

How do you decide between debt and equity?

The SORP requires members’ participation rights in the earnings or assets of an LLP to be analysed between financial liabilities and equity under Section 22 of FRS 102. Depending on the members’ agreement, those rights may give rise to equity, liabilities or both. The current edition, published in November 2025, applies to periods starting on or after 1 January 2026.

FRS 102 paragraph 22.3 defines equity as the residual interest in the assets after deducting all liabilities, and a financial liability as including a contractual obligation to deliver cash or another financial asset. Paragraph 22.3A adds that where settlement depends on uncertain future events outside the control of both the entity and the holder, the instrument is a liability unless one of the listed exceptions applies. The practical test is whether the LLP has an unconditional right to avoid paying the member. For the wider rules see FRS 102 Section 22.

Is members’ capital debt or equity?

It depends on what the agreement says about repayment.

• Capital repayable when a member retires or leaves. Retirement and death are events the LLP does not control, so a right to have capital repaid on leaving is a contractual obligation to deliver cash. Under paragraph 22.3A that points to a liability, shown in loans and other debts due to members.
• The puttable instrument exception. Paragraph 22.4(a) lets an instrument that would otherwise be a liability be classified as equity if it meets all the puttable instrument conditions, including that it entitles the holder to a pro rata share of net assets on liquidation, sits in the most subordinate class with identical features, and has expected cash flows based substantially on the profit or loss or net assets of the entity. Fixed capital repaid at its nominal amount will usually fail the last condition, because paragraph 22.5(b) says an instrument repaid on some other basis than a pro rata share of net assets is a liability.
• Repayment at the LLP’s discretion. Paragraph 22.6 treats members’ shares in cooperative entities and similar instruments as equity where the entity has an unconditional right to refuse redemption, or redemption is unconditionally prohibited by law or the governing charter. Capital that is only repaid if the members as a body decide to repay it is the LLP equivalent.

Read the whole agreement, not only the capital clause. A clause that lets a retiring member demand repayment within a fixed period overrides general wording that capital is “permanent”. The guide to LLP agreements covers the drafting.

Where do undivided profits and losses go?

Profit that has not yet been divided among members, because the agreement leaves the division to a later decision, stays in other reserves within members’ other interests. Once divided, the amount owed becomes a debt due to members. The companion guide on members’ remuneration explains when division happens.

Losses follow the agreement. ICAEW’s Technical Advisory Service helpsheet on allocating losses in LLPs says most membership agreements make no specific provision for losses, and in that case the loss should be allocated to other reserves within members’ other interests. If the agreement does provide for losses to be allocated to members, that provision must be followed, which reduces the amounts due to those members or creates a debt from them.

What notes are required?

For medium and large LLPs, SI 2008/1913, Schedule 1, paragraph 47 requires a reconciliation of loans and other debts due to members showing:

1. the opening balance;
2. amounts contributed by members in the year;
3. amounts transferred to or from the profit and loss account;
4. amounts withdrawn by or applied on behalf of members;
5. the closing balance; and
6. the amount falling due after one year.

The equivalent paragraph for small LLPs (paragraph 46 of Schedule 1 to SI 2008/1912) was omitted by the Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016 (SI 2016/575). Small LLPs therefore rely on the true and fair requirement and the LLP SORP, which at paragraph 27 of the 2026 edition still requires certain SORP disclosures from all LLPs, small ones included, unless the information is not material and not required by the regulations.

How does this work in practice?

Illustration only. An LLP has four members, each of whom contributed £50,000 of capital. The agreement says capital is repaid within six months of a member retiring. At the year end, £120,000 of profit has been automatically divided but not yet drawn, and £30,000 of profit is awaiting a discretionary division decision. One member has also lent the LLP £25,000 on loan terms.

Item	Heading	£
Members’ capital, repayable on retirement	Loans and other debts due to members	200,000
Profit divided and owed to members	Loans and other debts due to members	120,000
Member’s loan	Loans and other debts due to members	25,000
Profit awaiting discretionary division	Members’ other interests: other reserves	30,000

If the agreement instead said capital is repaid only when the members decide, the £200,000 would move to members’ capital within members’ other interests, and net assets would rise by the same amount. The underlying cash is identical; only the members’ rights differ.

What about groups and subsidiary LLPs?

FRS 102 paragraph 22.5(d) says a puttable instrument classified as equity in a subsidiary’s own accounts is classified as a liability in the consolidated accounts. The 2024 edition of the SORP added paragraphs 119A to 119H on how members’ debt and equity interests in a subsidiary LLP are treated when deciding whether to recognise a non controlling interest in the group’s net assets.

Does the classification affect tax?

Not directly. A trading LLP is normally transparent for tax, as HMRC’s Partnership Manual at PM131450 explains, and members are taxed on their profit shares however the balance sheet presents their capital. Capital still has tax relevance elsewhere: HMRC’s guidance at PM196000 limits sideways loss relief by reference to a member’s capital contribution, and the salaried members rules compare capital with disguised salary. Those tests look at what the member contributed, not at the accounting heading.

What mistakes come up most often?

• Showing all members’ capital as equity by habit, when the agreement gives retiring members a right to repayment.
• Showing undivided profits as owed to members before any division has taken place.
• Ignoring a loss allocation clause, or allocating losses to members where the agreement is silent.
• Leaving out the reconciliation of loans and other debts due to members in medium and large LLP accounts.
• Changing the agreement during the year without revisiting the classification at the balance sheet date.

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Related Accountapedia entries

• Overdrawn member accounts in an LLP
• The LLP SORP explained
• Why LLP accounts show no tax on profits
• Accounting for retirement benefits to LLP members
• Debt or equity: classifying preference shares
• Accounting for a debt for equity swap
• Debt for equity swaps: tax for the company

Sources

• legislation.gov.uk: SI 2008/1913, schedule 1
• legislation.gov.uk: SI 2008/1912, schedule 1
• ACCA: The new LLP SORP 2024
• ICAEW: Llps
• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• ICAEW: Allocation of losses in llps
• ACCA: Charities LLPs SORPS updated
• GOV.UK: Manual page PM131450
• GOV.UK: Manual page PM196000
• GOV.UK: Manual page PM251010

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.