When you set up a business, choosing the structure is a key decision. But which is right for your business – Ltd company or LLP?
Whether you choose an LLP or a limited company, you need to know what they mean and the differences between them.
What is an LLP?
LLPs (Limited Liability Partnerships) were introduced by the UK Government in 2001. An LLP is designed to be a halfway point between a traditional partnership and a private limited company.
In the traditional partnership arrangement, two or more members come together in business and take a share of profits. But they also share joint responsibility for debts.
LLPs were introduced to encourage the formation of partnerships, but to offer a similar level of financial protection to that received by owners of a limited company.
In other words, this means a separation between personal and business liability. Your liability for debts and third-party claims is limited to your investment and the personal guarantees you put in place.
Just like a traditional partnership though, LLP’s allow for a flexible structure where all partners can be involved in the management of the business. They’ve become a popular and credible corporate structure for many professional service firms.
So, for those who like the idea, it’s an opportunity to enjoy some of the benefits of a partnership while also limiting your liability. However, LLPs aren’t for everyone.
How do LLPs differ from limited companies?
Well firstly, there are a few similarities. For example, limited companies and LLPs both need to be incorporated at Companies House. This means they both have filing and reporting requirements and limited liability for members. But that’s where the similarities end.
Shareholders and directors
Companies must have shareholders (who own the shares of the company) and directors (who run the company for the shareholders). This is because a company is limited by shares or guarantee. In plain English, shareholders are only liable for the amount and value of shares they own.
Shareholders and directors can be the same person though, and this usually the case when a company is set up by a sole director.
An LLP on the other hand, must be set up by two or more partners and have at least two partners designated to assume additional legal responsibilities on behalf of the business. The limit of each partner’s liability is agreed between them.
Taxes and profits
Charities or other non-profit organisations can be set up as companies, but an LLP must be set up as a profit-making business.
On the other hand, companies must pay corporation tax on all profits while LLPs don’t. Instead, each LLP member counts as self-employed and must complete an annual self-assessment tax return.
Limited companies can sell shares for profit and give investors a dividend. An LLP cannot sell shares or receive money/property from them.
Companies must also include details of their internal structure and management rules in their articles of association (the documentation required to form a company with Companies House), whereas LLPs have flexibility and can change their structure as often as required.
Should I choose an LLP or a limited company?
The answer depends entirely on the nature of your business and how you want it to be run.
LLPs tend to be more suitable for a partnership with a small number of members, making similar contributions to the growth of the company and choosing to pay themselves with a share of profit. Such as solicitors, for example.
However, if you want to sell shares in your business or are planning to employ many people, whose total salaries will be higher than the owners’, a private limited company could be more tax efficient.
Can I choose to convert my LLP to a limited company later?
Of course! There may come a time when you decide that an LLP is no longer the right option for the business and/or its partners.
To do this, all the partners will have to agree to transfer the assets of the partnership into a limited company structure. You’ll have to arrange directors and shareholders in the same way as a limited company and register the change at Companies House.
This is something you can do with help from your accountant or a company formation agent.