A limited liability partnership (LLP) is a partnership in which partners have limited liabilities. It therefore has elements of both partnerships and limited companies. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence, unlike in an un-limited partnership where all partners are equally responsible for each other’s actions. Your personal liability is limited to the agreed amount of capital contributions put into the LLP.
- Must be set up as a profit-making business – cannot be used for non-profit enterprises or charities.
- Must have at least two members (partners) at all times – although one partner can be a dormant entity.
- At least two partners must be ‘designated’ members and assume additional legal responsibilities on behalf of the entire LLP and its members.
- There are no shares, shareholders or directors in an LLP, only ‘partners’.
- LLPs do not pay corporation tax – each LLP member is taxed through Self-Assessment as a self-employed individual.
- Annual accounts and a confirmation statement must be delivered to Companies House each year.
- Limit of each LLP member’s liability is agreed between the members and usually stated in a partnership agreement.
- A partnership agreement is often drawn up to outline the rights, responsibilities and liability of each member, and specify the way in which the LLP should be managed. This is similar to a shareholder’s agreement in a Limited Company.
- LLPs have a flexible internal structure that can be changed at any time, as often as required.
- LLPs do not have shares to sell and, therefore, cannot receive capital investment in exchange for a portion of ownership of the business from non-LLP members.
- Must maintain a PSC register.
Limited company or LLP?
The most suitable structure depends on a number of factors, such as: the kind of business you have, the number of people setting it up, your preferred internal management structure, tax liabilities, profit distribution, and the options you would like for removing profits and keeping surplus income in the business.
When to choose an LLP
An LLP is a great alternate structure for any business that currently operates as a traditional partnership with a small and consistent number of members who each make comparable contributions and draw similar profits. An LLP is also particularly beneficial if the activities of the partnership involve high-risk services, or there is a likelihood that claims for damages could be brought against the business. Furthermore, the flexibility offered from a partnership structure is often the determining factor for certain professions.
When to choose a company
If your business is non-profit, your decision is clear-cut. You should form a company limited by guarantee. If you wish to sell shares in your business to raise capital, and/or you plan to employ lots of people with a payroll that will likely be higher than the owners’ salaries, a private company limited by shares would be a better choice in terms of tax-efficiency.
The main features of LLP vs a Limited Company can be summarised as follows:
|Legislation||LLP Act 2000||Companies Act 2006|
|Capital Requirements||· Does not issue shares
· No minimum capital requirements
|· Minimum capital requirement of GBP1 (recommended GBP100.00)|
|· Minimum of 2 members.
· No secretary required Designated member needed to perform compliance duties
|· Minimum of 1 director
· Not obligated to have a secretary (but we advise customers to appoint one to reduce responsibilities of director(s))
|Meetings||Not obligated to hold meetings||Must comply with regulations for meetings|
|Extraction of profits||Profits allotted according to LLP Agreement||Earnings may be withdrawn through dividends|
|Liability||Liability limited by value of capital contributed.||Limited to the value of unpaid shares|
|Disclosure||LLP Agreements are not submitted to Registry
A Confirmation statement and accounts required to be submitted along with other returns
|· Shareholder information and profit split accessible by public at Registry
· A confirmation statement and accounts required to be submitted along with other returns
· Abbreviated accounts required for small companies
|Records||Details and minutes of meetings are not required||Records and minutes of meetings must be maintained; registers of directors/shareholders/secretaries must be maintained|
|Withdrawal of profits||Because there are no rules of ‘capital maintenance’, LLP members are free to withdraw profits||· Rules for capital maintenance restrict members from withdrawing profits if accumulated profits are insufficient|
Tax differences between a LLP and a limited company can be summarised below:
|Legislation||LLP Act 2000||Companies Act 2006|
|Corporation Tax||Only payable if members are companies involved in trade.||Payable by all Ltd companies:
· Small companies — 20%
|PAYE, NIC (Class 1, 2, 4)||Not payable by members of but Class 2, 4 apply||Payable by ltd. company, and Class 1 applies to directors|
|VAT||Payable irrespective whether is a LLP or a Ltd. company||Payable irrespective whether is a LLP or a Ltd. company|
|Accounting Reference Date(ARD)||From 6th April to 5th April from personal tax perspective.||Can be chosen by the company|
|Treatment of losses carried forward||Subject to restrictions but rules are generally flexible for a LLP||Can carry trading losses against available profits forward indefinitely|
|Deferral of tax liability||Not possible||Can be done through dividend payment and ARD|
|Enterprise Investment Scheme(EIS)||Not available||Can be registered for|
|Entrepreneurs’ relief (ER)||Available||Can be applied for|