What Is a Limited Liability Partnership (LLP)?
When starting a new company, you have to decide what type of company registration suits your business needs. Is your business more suited to a limited liability partnership or a limited company? Or perhaps neither! Fortunately, we’ve put together this essential guide to help you better understand all things “limited liability partnership”.
What Defines a Limited Liability Partnership?
Similar to a limited company, a limited liability partnership is a form of incorporated business structure introduced by the LLP Act 2000. It is often suited to professions that conventionally operate as a traditional partnership (solicitors, accountants, dental practitioners, etc).
Once a limited liability partnership is incorporated with Companies House, it attains independent legal status, offering limited liability to its members. This reduced financial responsibility is quite advantageous, as it safeguards the personal finances of members more than their capital contribution or any financial commitment they might have made to the limited liability partnership.
Limited Liability Partnership Vs Traditional Partnership
A “partnership” is simply a company structure formed by two or more individuals. This can run as a traditional partnership or as a limited liability partnership. The key difference between the two rests in the financial responsibility of the partners.
In a traditional partnership, the complete company debts rest with the partners. However, there is a lesser financial liability upon partners in limited liability partnership — often a deciding factor for business owners. This comparative financial “relief” is similar to the protection available for limited company owners.
Those that would normally operate as a traditional partnership can benefit from the birth of limited liability partnerships since the financial implications are highly favourable with limited companies coupled with the advantages that come with a partnership (partner duties, management structure, taxation implications, etc.).
Limited Liability Partnership Vs Limited Company
Limited companies and limited liability companies both have to be incorporated at Companies House under the Companies Act 2006 and the LLP Act 2000, respectively. They both share a number of similarities and differences:
Private Limited Companies
- May be limited by shares (for-profit) or limited by guarantee (non-profit).
- Require at least one shareholder/guarantor (owner) and one director (manager) – a sole individual can assume both roles.
- A registered office address is required in the same UK location of incorporation – England and Wales, Scotland, or Northern Ireland.
- Corporation tax is paid on all profits.
- Annual accounts, a confirmation statement and a Company Tax Return must be filed each year.
- Shareholders get a share of company profits (dividend payments).
- Shareholders’ rights, responsibilities and liabilities are determined by the number, class and value of their shares.
- The internal structure and management guidelines are outlined in the articles of association and shareholders’ agreement.
- Companies that are limited by shares may sell shares in exchange for capital investment.
- PSC registers must be maintained.
Limited Liability Partnerships
- Must be a profit-making business.
- Must perpetually assign at least two partners (members), of which at least two have to be designated members and undertake legal responsibilities on behalf of the whole limited liability partnership.
- There are zero shares, shareholders or directors.
- A registered office address must be located in the country of incorporation.
- No corporation tax – each limited liability partnership member pays tax via Self-Assessment as a self-employed individual.
- Companies House must receive a limited liability partnership’s annual accounts and a confirmation statement each year.
- Limit of each member’s liability is agreed between the members (traditionally outlined in a partnership agreement).
- Presence of a flexible internal structure that may be amended at any time, and as often as desired.
- Capital investment cannot be received in exchange for ownership from non-LLP members as a limited liability partnership does not have shares.
- PSC registers must be maintained.
When Is a Limited Liability Partnership the Best Option?
Forming a limited liability partnership is advisable in the following situations:
- Should you desire to structure your business like a flexible partnership
- Should you desire to establish a joint business enterprise in a controlled profession, for instance: dentistry, legal, dental, chartered accountancy and surveying.
- You are currently running your enterprise as a common, unincorporated partnership, however wish to preserve your personal financial situation from possible business liability incidents.
- Your current partnership offers to accept high-value contracts from larger corporations.
- Your current partnership offers to perform business functions that could most likely result in liability claims.
When Is a Limited Company the Best Option?
Conversely, forming a limited company may be advisable in the following situations:
- Establishing and operating a business independently.
- Enrolling your company and its name prior to the commencement of trading.
- Establishing an inactive company.
- Employing a high number of individuals.
- Operating a non-profit enterprise, charity or social enterprise.
- Raising capital investment.
What Are the Advantages of a Limited Liability Partnership?
Restriction on liability
Whenever a limited liability encounters financial issues, or a limited liability partnership member is prosecuted, the liability of every member is restricted to the money they have contributed to the partnership.
Limited liability partnerships are generally not taxed as corporations. Their profits are taxed via Self-Assessment. However, they must pay Corporation Tax. The members pay National Insurance and Income Tax via Self-Assessment on individual share of business gains.
The internal administrative structure of a limited liability partnership is just as versatile as a conventional partnership. You can easily make modifications to the legal rights and responsibilities of the partners and change their capital investment as well as profit-sharing ratios.
A limited liability partnership enhances the professional standing of a venture. Oftentimes this is more desirable to other companies and larger corporations, and it is especially advantageous with regards to high-value contracts.
Easy to appoint new members
Because there is no share capital in limited liability partnerships, there is no need to transfer or issue additional shares in order to bring in new members. The appointment of new members simply requires an agreement with existing members.
No articles of association
Limited liability partnerships do not require adopting articles of association to regulate the relationships between members and the actual LLP. Internal regulations can be outlined in a partnership agreement at the judgment of the members. This is an optional, private document, thereby making alterations a simple process. If no partnership agreement is drawn up, every member is viewed as having equal rights and responsibilities.
National insurance savings
A limited liability partnership has no registrable liability as an employer if the only people working through the company are members. There is also no requirement to pay Class 1 Employers’ National Insurance Contributions on any profit paid to members.
There is no legal requirement to hold board meetings or general meetings.
What Are the Disadvantages of a Limited Liability Partnership?
Financial accounts and members’ details must be disclosed to Companies House and shown on public record.
Income Tax liabilities
Income Tax through Self-Assessment can be as high as 45%, whereas Corporation Tax is charged at a flat rate of 20%.
Less effective tax planning
Members need to pay Income Tax in the tax year wherein income is received. In the event that a limited liability partnership’s profits remain in the business as working capital, partners will have to pay National Insurance and Income Tax for that profit.
Obtaining equity investment is difficult. There is no share capital structure in a limited liability partnership, so you cannot simply sell portions of the business to non-members. Anyone wishing to invest capital in an LLP must be an appointed a member who participates in the running of the business. Limited liability partnerships may only accept loan capital from non-members.
Details have to be maintained at Companies House and any changes must be reported within a certain amount of time. Financial accounts and annual returns have to be prepared for Companies House each year.
A limited liability partnership is legally required to maintain accurate and updated statutory records and registers at its registered office. Statutory registers and records may be inspected by the public at the registered office of an LLP. Any individual or organisation may request to view these official records (including financial accounts) for any reasonable purpose.
Not suitable for everyone
A limited liability partnership is not suitable for carrying out non-profit or charitable activities. A limited liability partnership cannot be setup with the aim of remaining inactive for an indefinite time period since limited liability partnerships need to be registered with the aim of trading and making profits.
A limited liability partnership must have a registered office address in one UK jurisdiction. Members must each provide a service address to receive statutory email.
Selected limited liability members
At least two partners in a limited liability partnership must be formally selected as “designated members” during the incorporation process. In the event that no such nominations were made, all members are chosen by Companies House. Designated members are responsible for registering the limited liability partnership at Companies House and ensuring the partnership and its members adhere to all statutory requirements. Their duties should be clearly stated in any formulated partnership agreement. Such duties shall include:
- Completing and delivering annual returns to Companies House
- Preparing and signing partnership accounts
- Delivering the partnership account to Companies House
- Providing copies of partnership accounts to all members
- The selection of an auditor and an accountant
- Updating the statutory records and registers in the limited liability partnership’s custody
- Ensuring every member correctly fulfils their Self-Assessment tax returns on time
- Keeping Companies House updated whenever the LLP’s or members’ details change
- Messaging Companies House whenever members leave or join the partnership
- Enrolling the business for VAT and PAYE (when needed)
- Signing agreements and documents in favour of the enterprise
- Making sure all obligations are satisfied
- Working on behalf of the partnership in response to any winding up scenario
How Can I Register a Limited Liability Partnership?
Limited liability partnerships are generally registered online and with the assistance of a credible company formations agent within three hours (without any documents, signatures or personal meetings). Simply enter your LLP information on a web-based application form and post it to Companies House. Once your registration is approved, your limited liability partnership will commence trading.
It’s important that you provide a distinct business name and select the country where you prefer your limited liability partnership to be formally licensed (Scotland, England and Wales, or Northern Ireland). Likewise, you will need to provide an authorised office address in the same country. This particular address will be documented at Companies House for the purpose of notification and mentioned on public record.
It’s not difficult registering a limited liability partnership but it is highly recommended to write down a partnership contract, or partnership deed, to indicate the rights and obligations of each member. This is a private, non-obligatory document. It is not statutory to have such an agreement or divulge its details on public record, however it’s necessary in practice. Limited liability partnership members lack employee shares or contracts, and therefore a partnership contract is the most suitable way to outline the terms and conditions of the partnership.
If you want to find out more about a limited liability partnership (LLP), or you’re wondering whether this is the best choice for your business, contact our knowledgeable company formations team now for expert advice and guidance.