Last Updated: Apr 12, 2024

Guide to Limited Liability Partnerships (LLP)

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Key Takeaways

  • A Limited Liability Partnership (LLP) exists between two co-founders (two individuals, or an individual and a company or two corporate bodies) who decide to start a profit-making venture together.
  • Among the UK business structure options, LLPs offer the flexibility, tax efficiency, and risk protection necessary to bolster the partners as they pursue their mutual objectives.

What Is a Limited Liability Partnership?

Like a limited company, an LLP structure is a form of incorporated business governed by the Limited Liability Partnerships Act 2000. It is suitable for professions traditionally operating as general partnerships, such as law firms, accountants, dental practitioners, etc. Upon registering with Companies House, an LLP becomes a separate legal person capable of suing or being sued, offering limited liability protection to its members.

Limited Liability Partnership Vs. Traditional Partnership

The term “partnership” refers to a business structure comprising two or more individuals, an individual, and a company or two companies who come together with a view of making a profit. Such a business can function as a traditional partnership, also known as a general or ordinary partnership or an LLP.

The critical difference between the two rests in the financial responsibility of the partners and the extent to which one partner is liable for the independent or unauthorised actions of the other(s).

In a traditional partnership established under the UK Partnership Act 1890, liability isn’t capped (unlimited), and the partners are personally liable and equally bear the full legal responsibility for business debts and risks. If the business cannot settle its debt or any other legal obligation, a court may order the seizure and sale of the members’ private assets.

In contrast, partners’ responsibility in a limited arrangement is capped to their capital contribution, meaning the members of an LLP do not worry about losing their private assets if the company fails. In terms of the actions of other partners, all partners are liable for the actions of all other partners in a GP. While in an LLP, partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Can a General Partnership (GP) Convert to an LLP?

Yes. If, at the moment, you are in a traditional partnership, you can incorporate a UK LLP and execute a transfer agreement that conveys the business from the GP to the LLP.

Having done this, you’ll need to dissolve the former partnership by having one of the partners submit a notice to exit or, according to the stipulations of your partnership agreement.

Launch Your LLP Hassle Free

Form your limited liability partnership online in just 6 hours. No paperwork, no signatures required.

How Can a Sole Proprietorship Convert to an LLP?

An LLP must have at least two members. Therefore, a sole proprietor can register a dormant company and have it as the second member in the LLP, provided the dormant company doesn’t carry out any income-generating activities. After forming the company, tell HMRC that the new business is dormant for company tax. Once you do this, you maintain your self-assessment tax status and enjoy the convenience of doing business as an LLP.

Read: What Is a Dormant Company?

In the business landscape, having an innovative structure is crucial. If you’re considering forming an LLP as a sole trader, we’ve got the perfect solution. Go to our service offering, select the digital formation package, and provide your preferred company name and the other relevant details requested through our online formation platform. Your company will be formed in just 3 hours, and you’ll receive your unique taxpayer reference number from HMRC by post. Once you get the number, you can tell HMRC your company is dormant for corporation tax.

What Is the Difference Between an LLP and a Limited Liability Company?

LLPs and private limited companies must be incorporated at Companies House under the Companies Act 2006 and the LLP Act 2000, respectively. They both share several similarities and differences.

Guide to Limited Liability Partnerships (LLP) Your Company Formations

See also: What Is a Limited Company

When Is Forming a Limited Liability Partnership the Best Option?

Consider forming an LLP if you —

  • Intend to maintain your self-assessment tax status but limit personal liability to your capital investment.
  • Are a lawyer, dentist, or chartered accountant who wants to establish a joint venture with another professional.
  • Run a sole proprietorship or an ordinary partnership, and you wish to leverage the legal protections of an LLP.
  • Business dynamics are changing, and your current partnership offers to perform business functions that could most likely result in liability claims.
  • Your current partnership intends to accept high-value contracts from larger corporations.

Further reading: Advantages and disadvantages of becoming a sole trader

When Is a Limited Company the Best Option?

Conversely, forming a limited company may be advisable when you want to —

  • Establish and operate a business independently.
  • Protect your company name using a dormant company as part of your preparations to go into business soon.
  • Register a dormant company to act as your partner in an LLP.
  • Raising capital investment.

What Are the Benefits of an LLP?

An LLP is an attractive option for entrepreneurs because it offers the same protection as a business limited by shares and the flexibility of a partnership in terms of tax and management. The top 7 benefits include —

  1. Limit on liability (business risk exposure) — Whenever a limited liability encounters financial issues, and the business becomes insolvent, the liability of the members is limited to their capital investment.

  2. Flexibility and ease of adopting new members or partners — The internal administrative structure of an llp is just as versatile as that of a general partnership. You can easily modify the legal rights and responsibilities of the partners and change their capital investment and profit-sharing ratios. It is this flexibility that makes it an ideal choice for professional firms that may need to frequently adjust ownership ratios as incentives for their staff.

    Because there is no share capital in LLPs, transferring or issuing additional shares is unnecessary to bring in new members. Such an appointment only requires the agreement of the existing partners.

  3. Professional reputation — A limited liability partnership enhances the professional standing of a venture. Frequently, an llp is more desirable to other companies and larger corporations, and it is especially advantageous for those who engage in high-value contracts.

  4. No articles of association and shareholders’ agreement — LLPs are not required to adopt articles of association to regulate the relationship between members. Internal regulations can be outlined in an LLP agreement according to terms reached by the members. However, the deal is an optional, private document, making alterations a simple process. If no partnership contract is drawn up, every member is viewed as having equal rights and responsibilities. However, the partnership will automatically dissolve without a formal agreement if one partner resigns, retires, becomes bankrupt, or dies.

  5. National insurance savings — An llp has fewer employer obligations if the people working in it are its members. However, there is a distinction between salaried and non-salaried members. Salaried members are treated as employees for tax and National Insurance (NI) purposes if they meet specific conditions related to significant influence, disguised salary, and capital contributions.

    For non-salaried members, the LLP is not required to pay Class 1 Employers’ National Insurance Contributions on any profit paid to them. However, for salaried members, the LLP is required to pay National Insurance Contributions through PAYE.

  6. Fewer formalities — There is no legal requirement to hold board meetings or general meetings.

What Are the Disadvantages of an LLP?

LLPs have increased regulatory compliance requirements, leading to higher administrative costs than alternative partnership structures like general or limited partnerships. Additional disadvantages encompass—

  1. Privacy — Financial accounts and members’ details must be disclosed to the Registrar and shown on public records.

  2. Income Tax liabilities —- According to HM Revenue & Customs, self assessment for the tax year 2023-2024 is currently at 45% for those earning over £150,000 per year, with the basic rate starting at 20% for the £12,571 – £50,270 income bracket. In contrast, the corporation tax is charged at a flat rate of 19%.

  3. Less effective tax planning — Members of a Limited Liability Partnership (LLP) must pay Income Tax in the tax year when income is earned. Suppose an LLP retains its profits as working capital. In that case, partners must still pay Income Tax and National Insurance on their share, unlike in a Limited Company (LTD), where directors can choose when to extract profits, potentially opting for a more advantageous financial year for tax purposes.

  4. Investment opportunities — A limited liability partnership has no share capital structure, so you cannot simply sell portions of the business to non-members. Anyone wishing to invest capital in an LLP must be an appointed member participating in the company’s management.

  5. Reporting regulations — The entity’s details must be maintained at Companies House, and any changes must be reported within a certain period. Financial accounts and annual returns must be prepared for submission to the Registrar each year.

  6. Statutory records — An LLP is legally required to maintain accurate and updated statutory records and registers at its registered office and allow the public to inspect upon proper request. Any individual or organisation may request to view these official records (including financial accounts) for any reasonable purpose.

  7. Not suitable for everyone — A limited liability partnership is unsuitable for non-profit or charitable activities. If you wish to register a non-profit, consider forming a company limited by guarantee, a charitable incorporated organisation (CIO), or an unincorporated charitable association. Further, a limited liability partnership cannot be set up to be dormant but should only be incorporated if the objective is to actively trade and make a profit.

How Can I Set up an LLP With Companies House?

Limited liability partnerships are generally registered online, and Your Company Formations can set you up within three hours (without any documents, signatures, or personal meetings). Simply enter your LLP information details on our web-based application form through our portal and post it to the Registrar of Companies. Once your registration is approved, you will receive a certificate of incorporation, and your limited liability partnership can commence trading.

You must provide a distinct business name and select the country where you prefer your limited liability partnership to be formally registered (Scotland, England and Wales, or Northern Ireland). Likewise, you must have a registered office address in the same country. This address will be publicly documented at the Registrar and used by government agencies to send statutory notifications.

Fast Fact

At least two partners in a limited liability partnership must be formally selected as “designated members” during the incorporation process. However, if no such nominations were made, Companies House will mark all members as designated.

Designated members are responsible for registering the limited liability partnership with the Registrar of Companies and ensuring the partnership and its members adhere to all statutory requirements. Their duties should be clearly stated in a partnership agreement. Such responsibilities shall include:

  • Completing and delivering annual returns to Companies House
  • Preparing, signing and delivering partnership accounts to HMRC
  • Providing copies of partnership accounts to all members.
  • Selection of the auditor and an accountant
  • Updating the statutory records and registers in the limited liability partnership’s custody
  • Ensuring every member correctly files their Self-Assessment tax returns on time
  • Keeping Companies House updated whenever the LLP’s or members’ details change, members leave or join the venture
  • Enrolling the business for VAT and PAYE (as 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

Do Limited Liability Partnerships Pay Corporation Tax?

Though LLPs have limited liability, the venture is not considered an entity separate from its owners for tax purposes. Members pay for national insurance and tax on profits via self-assessment based on their share of the profits from the business. Unlike an LTD, which is double taxed when the company taxes profits and the shareholders and directors are taxed on dividends and salaries.

What Is the Difference Between a General Partnership, a Limited Partnership and an LLP?

Criteria General Partnership Limited Partnership Limited Liability Partnership

Legal entity

  • Not a separate legal entity.

  • Not a separate legal person.

  • The business is a separate entity distinct from its members.

Registered office address

  • Not required to provide a registered office address.

  • Must provide a registered office within the UK.*

  • Must provide a registered office within the UK.*

Confirmation statements

  • Not required to file annual confirmation statements.

  • Required to file annual confirmation statements.*

  • Required to file annual confirmation statements.*

Liability

  • All partners have unlimited liability.

  • General partners have unlimited liability, and limited partners have liability restricted to their investments.

  • Partners liability is limited to the amount invested in the business.

Formation

  • There is no formal requirement for partnerships under the Partnership Act 1890 to register.

  • However, partners are encouraged to work with a partnership agreement.

  • It is registered under Limited Partnerships Act 1907

  • Requires at least one general partner and must have at least one limited partner.

  • To register, you must send us an application for registration (form LP5) or a form LP5(s) if registering the LP in Scotland, signed by all the partners.

  • It is registered under the Limited Liability Partnerships Act 2000.

  • Choose a unique name according to Companies House company naming rules.

  • Compete form LL IN01 and submit it to Companies House with the required fee.

  • You can also form your limited liability partnership online for just £24.99.

  • Must register at least two designated members appointed during registration to perform functions similar to an LTD director.

Management & decision making

  • All partners participate and share complete management control with unlimited financial liability.

  • General partner(s) manage the business and are personally liable, while limited partners cannot participate in management without risking their limited liability.

  • All partners participate in decision-making with limited liability protection.

Capital contribution

  • No specific capital contribution requirements since all members are jointly liable for partnership obligations.

  • Liability of the limited members is limited to their capital contribution.

  • No specific capital contribution requirements since all members have unlimited liability.

Taxation

  • Tax transparency for income and capital gains – Profits are taxed as income of the respective partners.

  • Though the entity itself does not pay taxes, the nominated partner is responsible for filing the Partnership Tax Return to HMRC.

  • Tax transparency for income and capital gains – Profits are taxed as income of the respective partners.

  • Though the entity itself does not pay taxes, the nominated partner is responsible for filing the Partnership Tax Return to HMRC.

  • Tax transparency for income and capital gains.

  • Members of limited liability partnerships pay tax on income through self-assessment.

  • Though the entity itself does not pay taxes, the nominated partner is responsible for filing the Partnership Tax Return to HMRC.

Perpetual succession (Continuity)

  • No perpetual succession. If a partner dies, becomes bankrupt, or exits, the remaining partners may be required to draw up a new agreement.

  • No perpetual succession. If a partner dies, becomes bankrupt, or exits, the remaining partners may be required to draw up a new agreement.

  • It is a body corporate with perpetual succession. If a partner dies, becomes bankrupt, or exits, the remaining partners are not necessarily required to draw up a new agreement.

Registers

  • Not required

  • Not required

  • Register of members and persons with significant control (PSCs).

Procedures for dissolution

  • If a new partnership is admitted, the enterprise becomes a partnership at will, which can be dissolved any time one of the partners serves notice to the other. Unless the partnership agreement provides the procedure for retirement and expulsion of partners.

  • The partnership can be dissolved if any partner exits.

  • Dissolution by a court order.

  • Unless the limited partnership is for a fixed period, a general partner serving notice to exit automatically dissolves the partnership

  • By a winding up process to settle debts.

  • By a court order.

  • According to the terms of a partnership agreement.

  • Voluntary winding up after the partners pass a resolution.

  • Voluntary strike off

  • By a court order.

* These are new changes introduced by the Economic Crime and Corporate Transparency Act (2023).


Insight

According to gov.uk, where a partnership consists only of persons liable to Corporate Tax, it is referred to as a CT Partnership. Tax transparency still applies, meaning the partnership itself is not liable to tax on its profits; instead, each partner/member is taxable on their share of profit. LLP profits allocated to each limited company member are taxed at the applicable corporation tax rate.

Conclusion

It’s not difficult to register a limited liability partnership structure, and even though you are not legally required to have one, you should take the time to write down a partnership contract or partnership deed to indicate the rights and obligations of each member.

If you have any questions about forming a limited liability partnership or wonder whether this is the best choice for your business, please contact us by writing to us at info@yourcompanyformations.co.uk or calling +44(0) 207 689 7888 for a free no-obligation consultation for expert advice and guidance.

Important gov.uk partnership resources