What is a Limited Liability Partnership?

The burden of financial indebtedness falls solely on the partners when it comes to a typical partnership. However, in an LLP (Limited Liability Partnership), partners benefit from a reduced liability - which makes it more appealing for smaller businesses.

On the other hand, traditional partnerships and LLPs are fairly similar in many aspects. They both share the same structure when it comes to internal management, profit distribution and tax responsibility.

This article will help explain what an LLP is, the advantages, disadvantages and the differences between an LLP and Limited Company. As well as 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 an LLP?

LLP is an abbreviation for a Limited Liability Partnership, which is a standard business structure often suited to small independent companies and enterprises.

You might have an idea about LLP already, or wish to know more. So, if you want to learn the basics of LLP, then carry on reading.

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.

How Do LLPs Work?

LLPs are commonly used by professional firms such as solicitors and accountants, but the form can also be helpful for other sorts of businesses.

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.

Benefits of 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.

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.

Things to Remember

The following are some key points to consider about LLPs.

• The personal liability of each LLP member is typically limited to the capital contribution (or another agreed amount). The exception is if they've given personal guarantees or have been negligent in their duties.
• Partners benefit from shared risk, skills, and division of labour.
• Common in professional firms like law, accounting, and finance.
• LLPs don’t need to submit articles of association to Companies House.
• Members usually have a private agreement outlining roles and duties.
• Liability protection is similar to that of company directors and shareholders.
• Members aren’t liable for others’ actions but are for their own negligence.
• Clawback rules make members more exposed than company shareholders.
• LLPs follow the same insolvency rules as limited companies.

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 and as such we summarise the pros and cons, breaking down the advantages and disadvantages of forming a Limited Liability Partnership .

Pros of LLP

• ✔ Protection: Members’ personal assets are separate from the business debts, offering protection similar to limited companies. The LLP can continue trading even if a member resigns, goes bankrupt, or in the event of their death.
• ✔ Flexible Management: LLPs allow flexible arrangements for management and profit sharing, set out in the partnership agreement. Adding or removing members is simpler, with less formality than a limited company.
• ✔ Name and Legal Status: Once registered, the LLP’s name is protected, and it is recognized as a separate legal entity able to enter contracts, hire employees, and own property.
• ✔ Flexible Profit Distribution: Profits can be shared at members’ discretion, not rigidly tied to ownership percentages. LLPs can also make flexible financial distributions like loans or capital returns.
• ✔ Tax Efficiency: LLPs are not subject to corporation tax; members are taxed as partners, avoiding PAYE and Class 1 NICs. Recruiting new members is typically easier than in traditional partnerships.
• ✔ Allows Partners to Rent or Lease: Members can rent, lease, or purchase property through the LLP, which in return helps to provide flexibility to business operations.
• ✔ Separate Legal Person: The LLP’s debts belong to the company, not its members. Members’ liability is limited to their agreed capital contribution, except in cases of personal guarantees or negligence.

Cons of LLP

• ✖ Tax Complexity and Cost: Members are taxed individually on their share of profits at income tax rates up to 45%, which can be more expensive than corporation tax.
• ✖ No Tax-Efficient Share Incentives: LLPs cannot offer tax-efficient share schemes to employees, and anti-avoidance rules may apply to disguised employment situations.
• ✖ Public Disclosure: Annual accounts must be filed with Companies House, but small LLPs can file an abridged version (balance sheet only).
• ✖ Minimum Two Members Required: LLPs must have at least two members, so they are unsuitable for sole traders. If a member leaves, the LLP may be dissolved unless others remain.
• ✖ Higher Costs: Additional reporting and accounting requirements mean LLPs can be more expensive to run than traditional partnerships.
• ✖ Strict Filing Penalties: LLPs must file annual returns and tax documents regardless of activity. Failure to file can result in fines than range from £150 to £1,500 (depending on how late the accounts are).

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.

Companies 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 company 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 LLP members. The next step is to file 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.

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

Limited Companies:

• The personal liability of members (owners) is restricted to the value of their investments or guarantees to the company.
• This means members are not personally responsible for company debts beyond their investment.

LLPs:

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.

• 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, in which the document outlines their rights and responsibilities.

Choosing Between LLP and Limited Company

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.

Limited Liability Partnership (LLP):

• Cannot be used for non-profit purposes
• Ideal if starting a business with other partners
• Helps preserve personal assets
• Adaptable when hiring future employees
• Provides flexibility in management

Limited Company:

• Required when running a non-profit organisation
• Any business changes need approving by all members
• Prefered option if plans to raise capital
• Likewise if selling any of the business at later date
• Suited towards formal governance and clear shareholders

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 Companies 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 practice to have an agreement in place.

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.

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 company 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.