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  • What is an LLP?

    The burden of financial indebtedness falls solely on the partners in a typical partnership. However, the partners have decreased financial liability with an LLP, making this a more enticing alternative for many small enterprises.

    business meeting in office image

    On the other hand, traditional partnerships and LLPs are remarkably similar in many aspects. In terms of internal management and profit distribution and tax responsibility, they share the same structure.

    This article will help you understand what LLP is and the advantages and disadvantages of LLP and the difference between LLP and Limited Company and how to set a limited liability partnership.

    So, if you want to learn more about LLP, this article was created just for you.

    What is LLP?

    So, you might have an idea about LLP or have no idea at all, but here we will explain what LLP is and how the structure of LLP works. If you want to learn the basics of LLP, then carry on reading. 

    So, what is a limited liability partnership?

    The Limited Liability Partnerships Act 2000, which went into effect in April 2001, created a hybrid business entity that is neither a partnership nor a corporation.

    A limited liability partnership (LLP) has no shareholders or directors and is taxed similarly to a partnership. An LLP is a body corporate, similar to a corporation, and hence a separate legal organisation with limited liability for its members.

    Like that of a partnership, the LLP members' relationship is governed by a private agreement.

    A legal business structure is a limited liability partnership (LLP). Limited liability partnerships are commonly used by professional firms such as solicitors and accountants, but the form can also be helpful for other sorts of businesses.

    A limited liability partnership (LLP) is a legal entity separate from its members (partners), solely liable for the amount of money they invest and any personal guarantees. The partnership is registered with Companies House and can only be utilised by firms that profit.

    Partners must give the firm a registered address and keep a membership list. The maximum number of partners is unrestricted, although there must be at least two members at the time of incorporation, either people or limited businesses. It's also possible to form an LLP with just one person and a dormant business.

    It's better to start with the general partnership to understand an LLP. A general partnership is a for-profit business formed by two or more persons agreeing to work together.

    This is a pretty technical term for two or more people collaborating to make money. A general partnership might be a very informal arrangement. All that is required is a common interest, sometimes a written contract (though not always), and a handshake.

    A "limited liability partnership" is not to be confused with a "limited partnership," which is a completely separate entity. Limited partnerships are a sort of partnership that has been around in the United Kingdom since 1907.

    They've been popular in investment fund arrangements, but they're not frequently used as a company vehicle because they don't allow limited partners to have limited liability while also participating in business management.

    Professionals who employ LLPs place a high value on their reputation. The majority of LLPs are formed and managed by a group of experts with extensive expertise and clients.

    The partners reduce the cost of doing business while enhancing the LLP's ability for expansion by pooling resources. They can share office space, personnel, and other resources. Most importantly, cutting costs allows the partners to profit more from their actions collectively than they might individually.

    In an LLP, the partners may have several junior partners who work for them in the hopes of one day becoming full partners. These junior partners are given a salary but have little or no ownership or liability in the firm.

    The main thing to remember is that they are designated specialists who are qualified to complete the service that the partners provide.

    This is another method that LLPs assist their partners in scaling up their businesses. Junior partners and workers handle the details, allowing partners to concentrate on bringing in new business.

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    Things to remember about LLP:

    • Restricted liability partnerships (LLPs) are a type of partnership in which each partner's liability is limited to the amount of money they invest in the company.
    • Spreading risk, leveraging individual abilities and knowledge, and establishing a division of labour are all advantages of having business partners.
    • Limited liability means that creditors cannot seize a partner's assets or income if the partnership fails.
    • In professional businesses such as legal companies, accounting firms, and wealth managers, LLPs are common.

    Also, unlike a corporation, an LLP does not need to submit articles of association with the Registrar of Companies.

    Members will frequently engage in a members' agreement (which outlines the LLP members' rights and obligations), but this is a fully private document that does not need to be filed on any public register.

    LLPs provide liability protection that is similar to that provided to company directors and shareholders.

    In theory, an LLP member is not liable to third parties for losses caused by other members/employees or the financial implications of general business failure, but he or she may be liable to third parties for losses caused by his or her defaults.

    Although LLPs are subject to unique "clawback" provisions, which mean that members of an LLP are significantly more exposed than directors/shareholders of a company, the insolvency system applicable to LLPs is the same as for businesses.

    The Pros and Cons of an LLP

    There are a variety of methods that you can utilise to start your company. You might begin as a single simple trader, paying income tax but not registering your business. However, as your business grows, you may need a more formal framework.

    The LLP (Limited Liability Partnership) is a versatile corporate structure that was created with the modern workplace in mind. It was first introduced in the year 2000 and is now widely utilised.

    There are a lot of benefits and drawbacks to consider if you're thinking about forming an LLP. There are several LLP pros and cons. Here we will break down limited liability partnership advantages and disadvantages.

    The Pros of LLP

    There are many benefits to be given from trading through an LLP. Here are the pros:

    Protection

    The assets of those who own and control the business are kept separate, just like in a limited corporation. This offers business owners protection that alone traders cannot, particularly in terms of debts and obligations.

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    In the case of an LLP, the company can appoint two other companies as members. A Limited corporation, on the other hand, requires a minimum of one director who is an actual person.

    As a result, LLP provides a certain measure of privacy to its members, who can keep their identities disguised for as long as they like.

    If a member of an LLP resigns, goes bankrupt, or dies unexpectedly, you do not have to dissolve the company and all of its business activities. Despite the adverse circumstances, trading can continue unabated.

    Flexible Management

    An LLP is more flexible than a limited company, which must function under a fairly precise form.

    In a partnership agreement, you'll outline how the business functions and how profits are distributed. This implies there's greater room to cater to specific business requirements.

    Appointing or dismissing members, as well as changing their rights and responsibilities, requires less formality.

    Furthermore, choices do not necessitate shareholder meetings and the emotions that go along with them. A simple execution of a deed of adherence to the LLP Agreement can introduce a new member.

    You and your partners can decide on the contract's conditions, as well as the profit split and how it will be carried out. As a result, when you choose an LLP, things are more flexible, and you have more control over the company's management.

    Name and Status

    Once a limited liability partnership (LLP) is formed with Companies House, its name is safeguarded from other businesses attempting to register the same name.

    An LLP is also treated as a legal entity in its own right, which means it can enter into contracts, sign leases, hire employees, and own property.

    As a result, no other company or partnership can use the same name as yours when you register it with Companies House.

    Operation

    Members of an LLP can be assigned multiple statuses, allowing the business to be formed in a variety of ways. Unlike a limited company, where profits are shared rigidly according to shareholder percentages, LLP profits can be allocated at the discretion of the members.

    a business meeting in an office image

    In addition to profits, LLPs have far more flexibility in making other distributions (such as advance loans and capital returns to members), as they are not bound by capital maintenance regulations.

    Disruption of Profits

    Unlike a limited company, where profits are shared rigidly according to shareholder percentages, LLP profits can be allocated at the discretion of the members.

    In addition to profits, LLPs have far more flexibility in making other distributions (such as advance loans and capital returns to members), as they are not bound by capital maintenance regulations.

    Tax Efficiency

    Corporation tax does not apply to limited liability partnerships. The disadvantage is that profits cannot be re-invested in the business to avoid taxation (as is the situation with limited corporations); all profits are liable to income tax.

    Members of an LLP are often taxed as partners rather than workers or directors. They are exempt from paying PAYE and Class 1 NICs. Recruiting new members to an LLP is typically easier than recruiting new members to a traditional partnership.

    The prospect of unlimited responsibility for future partners could be a major deterrent.

    Allows Partners to Rent

    A limited liability partnership (LLP) permits its members to rent, lease, or purchase their property. In addition, they can use this tool to sign agreements or hire people.

    If your company is formed as a standard Limited Partnership, on the other hand, all partners will be required to sign particular paperwork in their names.

    LLP is a Separate Legal Person

    This means that the LLP's debts are not owed by the members. As a result, all agreements are made between the LLP and its clients or other third parties. If the LLP goes bankrupt, a member's liability is restricted to the amount of their contractual capital allocation.

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    In addition, any personal guarantees are worth their weight in gold. Members may be held accountable to the full extent of their assets if negligence is involved or if they've taken personal responsibility for the advice or work they've provided.

    The Cons of LLP

    When compared to the benefits of a limited liability partnership, the advantages of limited liability paired with favourable tax treatment will not be below average.

    The majority of the accompanying disclosure duties come at a cost. The following are some of the LLP's drawbacks:

    Tax

    Members of an LLP are taxed on their part of the LLP's income, with the amount paid depending on where the revenue falls within conventional income tax bands.

    So, on any income up to £33,500, 20% is due, then 40% on income between £33,500 and £150,000, and finally, 45 per cent on income exceeding £150,000. This is a more expensive approach to earn money than through a limited corporation.

    With tax relation you must give careful thought about:

    • Losses in trading LLPs are not eligible for tax relief. The rule applies to both 'sideways relief' and capital gains tax relief.
    • There will be no opportunity for tax-efficient share incentives for employees, as there is with a corporation, and anti-avoidance regulations may apply to cases involving "disguised employment."

    Profits from an LLP can't be kept in the company, and they're taxed right away if they come in. Limited liability firms pay corporation tax but can keep profits in the business for investment or working capital rather than paying dividends to shareholders, who may be taxed at higher marginal rates than the corporation tax rate.

    Public Disclosure

    A basic disadvantage of Limited Liability Partnerships, as well as a Limited corporation, is public disclosure. Because all financial documents must be filed with Companies House, everything is a public record, and hence there is no true privacy quotient here.

    These accounts also update the income of the partners regularly, which can be a serious infringement of one's privacy.

    The fundamental disadvantage of an LLP is public transparency. Financial statements must be filed with Companies House for public scrutiny. Members' income that they do not want to be made public may be disclosed in the accounts.

    Companies House used to keep track of residential addresses. While the usage of service addresses' now permits residential addresses to be hidden from the public eye, any address previously provided to Companies House remains public record until you pay to have the information suppressed.

    This isn't an issue for many firms. However, there are some instances where this isn't desirable. Consider the fact that if their job includes sensitive matters, solicitors and law firm partners may not want their home address to be made public.

    Can Only Run with Two or More Members

    A limited liability partnership (LLP) can only have two or more members. This means that if you form a Limited Liability Partnership with one or more people, you must make certain that they have no plans to leave.

    Otherwise, because an LLP cannot be governed by a single person, it could result in the firm being dissolved entirely.

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    If you're starting a business on your own or want to expand your company by issuing shares, an LLP isn't the best option.

    It's a better structure for general partners, such as doctors or lawyers, who require legal protection from obligations occurring in the course of business.

    Expensive

    Since an LLP has additional reporting and accounting obligations, it might be more expensive to incorporate than a typical partnership business.

    Penalty for Non-Compliance

    Even though an LLP has no activity, it must file an income tax return and an annual MCA form every year. A penalty of Rs.100 per day performed is imposed if an LLP fails to file Form 8 or Form 11 (LLP Annual Filing).

    The penalty has no cap, and if an LLP hasn't filed its yearly report in a few years, it might cost thousands of dollars.

    As you can see, there are several limited liability partnership pros and cons, so it’s worth considering each side to see whether it’s the right fit for you.

    LLP Vs Limited Company

    Choosing the correct form for your business, such as a Limited Liability Partnership or a Limited Company, might be difficult if you're just starting. Each has advantages and disadvantages, and what works for one company may not be appropriate for another.

    We break down how they differ, who might benefit from each structure, and how to get started.

    Businesses House is where LLPs and limited companies are formed. The difference between a limited company and an LLP is that a limited company has directors and shareholders, but an LLP just has members.

    The Articles of Association (and any corresponding Shareholders' Agreement) are a limited company's constitutional document. The Members' Agreement is the LLP's counterpart.

    For further information, please visit our separate Client Guides on ‘Incorporating a New Limited Liability Partnership' and ‘Incorporating a New Company.'

    Tax in a Limited Company Vs an LLP

    One of the most significant distinctions between limited corporations and LLPs is the tax treatment. Because a limited corporation is wholly independent of the people who work for it, this has tax implications:

    • Corporation Tax is paid on any taxable profits by a limited corporation in its own right.
    • The business income earned by the directors is taxed individually. Their source of income could be a wage paid by the company. If the board of directors is also a shareholder, they may be entitled to a portion of the company's income in the form of dividends.
    • The members of an LLP are taxable, not the LLP as a whole.

    So, for an LLP, there is no Company Tax Return and no Corporation Tax. Instead, the untaxed gains are dispersed among the company's shareholders. The next file is a Self- Assessment tax return to pay tax on the value of their portion.

    Similarities

    Limited companies and limited liability partnerships (LLPs) are both registered with Companies House and must file yearly accounts, but the manner they raise cash and pay members from the business is different.

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    The company can sell shares in return for capital, thereby selling a piece of the company to raise funds. Because there are no shares, shareholders, or directors in an LLP, this option is not available.

    Personal Liability for Limited Companies and LLP

    The level of personal accountability that members of the firm have for any debts is 'restricted' by private limited companies. The personal liability of the owners of a private limited company is limited to the value of their investments or guarantees to the company.

    In terms of tax obligation, an LLP is similar to a hybrid of a regular partnership and a limited liability partnership. Each partner's financial liability is lessened, similar to that of a limited company.

    This indicates that partners are not liable for one another's actions. Members agree on a monetary sum that they will pay if the company runs into financial difficulties, and they document it in the partnership agreement that spells out their rights and duties.

    Your choice of structure is mostly determined by your circumstances. Companies that often operate as partnerships, such as accountancy firms or solicitors, can benefit from LLPs. LLPs cannot be used for non-profit purposes. Thus if you need to run a non-profit, you need to form a limited company.

    If you want to start a business with other people, forming a partnership is a wonderful option. If the business fails, you can still preserve your assets by forming an LLP.

    An LLP is also more adaptable if you know you'll need to hire or fire personnel in the future, whereas a limited company's structure is more rigid. For some, though, this is a positive thing because it implies that any changes must be approved by everyone in the company.

    If you want to raise money for your business (or sell some or all of it in the future), then forming a limited company is the way to go. If you're running a non-profit organisation, you'll also need to form a corporation.

    Flexibility

    In terms of structure, both an LLP and a company offer flexibility, but members of an LLP arguably have more organisational flexibility and are free to agree on the affairs and governance of the LLP among themselves.

    The Businesses Act 2006, which imposes stronger limits on limited companies than the corresponding LLP legislation, must be followed when managing the activities of a limited company.

    As a result, LLP members have more flexibility in terms of how they share profits, remove money, structure their management, make decisions, and nominate and retiring members.

    Confidentiality

    An LLP Members' Agreement is private, unlike the Articles of Association of a limited company, which are publicly available at Companies House.

    Profit and loss sharing, shares in capital, management responsibilities, admission of new members, retirement and expulsion of members, and dispute resolution will all be covered in this Members' Agreement.

    The LLP statute offers certain default provisions if the members fail to deal with these issues. However, it is best to practise to have an agreement in place.

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    Although this level of confidentiality may be desirable, it is worth remembering that with the limited company structure, a certain level of confidentiality can be achieved by using a Shareholders' Agreement, which can be filed alongside the Articles and does not have to be filed with Companies House.

    Investment and Sale

    Limited corporations are sometimes seen as more appealing to investors since they allow them to purchase shares without having to become a director. An LLP investor must become a member, and a share or portion of the LLP cannot be sold in the same way that business shares may.

    Similarly, investing in and selling shares in a corporation is often easier than investing in and selling shares in an LLP.

    How to Set Up a Limited Liability Partnership

    LLPs are more difficult to form and manage than traditional partnerships. LLPs must meet many of the same rules as limited liability corporations, although they are intended for profit-making businesses.

    This business structure should not be used by non-profit organisations. Here we will go through how to set up a limited liability partnership, so if you are looking to set up and register for an LLP, then you will find everything you need to know here.

    To conduct a business with two or more members, you can form ('incorporate') a limited liability partnership (LLP). An individual or a company, termed as a 'corporate member,' can be a member.

    As in a 'regular' business partnership, each member pays tax on their share of the profits but is not personally liable for any obligations the business cannot pay.

    You'll need to do the following:

    • Select a name
    • Having a registered address (which will be made public)
    • Have a minimum of two 'designated members'
    • Register the LLP with Companies House and have an LLP agreement that states how the LLP will be run.

    Companies House can help you with the limited liability partnership registration process (LLP). They cannot, however, provide you with extensive instructions on how to prepare the essential paperwork.

    You can register your LLP yourself by filling out the LL IN01 application form and forwarding it to Companies House together with the cost. This can be found on the GOV.UK website. Getting professional counsel is a smart idea.

    For a fee, a company formation agent, solicitor, or accountant can complete the process and provide guidance. A solicitor can also assist you in drafting your deed of partnership.

    Many incorporation agents and software vendors can now give a web-based electronic service to their clients. This is a more convenient and faster approach to register your LLP, but it is also more expensive.

    If the LLP name you desire is the same as another LLP or firm on the registrar's index of company names, you might not be able to use it.

    However, there is an exception to this rule. The existing LLP or corporation must be in the same group as your LLP and must agree to the name you suggest.

    Choosing a Name

    A registered company's name cannot be the same as, or too similar to, yours. Your company name must end in LLP (Limited Liability Partnership). If your LLP is registered in Wales, you can use the Welsh counterparts.

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    Check the registration of companies at Companies House.

    If you choose a name that is too similar to an existing name, it will be regarded as "same as" or "too similar."

    The sole distinction between an existing name and a 'same as' name is:

    • A word or character that is similar in appearance or meaning to another from the existing name a word
    • A character that is commonly used in UK companies names a punctuation mark or a special character, such as the 'plus' sign, a word or character that is similar in appearance or meaning to another from the existing name

    It is not permissible for the name of your limited liability partnership to be offensive. Unless you acquire permission, your name cannot contain a 'sensitive' phrase or expression or suggest a relationship with the government or local authorities.

    Conclusion

    Overall, an LLP is a better alternative than an LLC or other corporate organisation for certain types of professionals because of its flexibility. For tax purposes, the LLP, like an LLC, is a flow-through entity.

    This means that the partners receive untaxed profits and are responsible for paying their taxes. A corporation, which is taxed as an entity and its shareholders are taxed again on distributions, is preferred to an LLC or an LLP.

    Professionals who employ LLPs place a high value on their reputation. The majority of LLPs are formed and managed by a group of experts with extensive expertise and clients.

    The partners reduce the cost of doing business while enhancing the LLP's ability for expansion by pooling resources. They can share office space, personnel, and other resources.

    Most importantly, cutting costs allows the partners to profit more from their actions collectively than they might individually.

    Sources

    https://www.investopedia.com/articles/investing/090214/limited-liability-partnership-llp-basics.asp
    https://applebymall.co.uk/pros-cons-registered-llp/#advantages
    https://www.targetaccounting.co.uk/blog/pros-cons-limited-liability-partnership-uk/
    https://accotax.co.uk/what-is-an-llp-and-what-are-advantages-disadvantages/
    https://hjsolicitors.co.uk/article/limited-liability-partnerships/#section-4
    https://www.theaccountancy.co.uk/limited-company/whats-difference-llp-limited-company-7698.html
    https://www.burnesspaull.com/insights-and-events/news/llp-vs-ltd-guide-UK
    https://www.bgateway.com/resources/set-up-and-register-a-limited-liability-partnership

    Last updated by MyJobQuote on 9th March 2022.

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