Limited liability partnerships (LLPs) are a type of legal structure for businesses of all sizes, which sit somewhere between a traditional partnership and a limited company.
In a traditional partnership, the burden of financial debts fall entirely on the partners, while in LLPs the partners have reduced financial responsibility, making this a more appealing option for many small businesses.
However in other ways, traditional partnerships and LLPs are very similar. They have the same structure in terms of internal management and distribution of profits, and in terms of tax liability.
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There are a few similarities, for example Private limited companies and LLPs both need to be incorporated at Companies House, which means they have more rigorous filing and reporting requirements, and they both have limited liability for members. But that’s where the similarities end.
While companies must have shareholders and directors, a partnership must consist of at least two partners and have at least two partners designated to assume additional legal responsibilities on behalf of the LLP.
Companies can be charities or other non-profit organisations, but LLPs have to be set up as a profit-making businesses. On the other hand, companies have to pay corporation tax while LLPs don’t, instead each LLP member counts as self employed and must complete an annual tax return.
Companies also have to include their internal structure and management rules in their articles of association (the documentation required to incorporate a company), whereas LLPs can change their internal structure as often as required.
Whether or not you should form an LLP depends entirely on the nature of your business and how you want it to run.
LLPs tend to be more suitable than limited companies for a partnership with a small, constant number of members who all make comparable contributions to the company and take home a similar level of profit – such as solicitors and accountancy firms.
However, if you wish to sell shares in your business or plan to employ lots of people whose total salaries will be higher than the owners’, a private limited company could be more tax efficient.
If you’re ready to form a partnership, you can use our partnership template for your submission to Companies House, or if you’ve decided you want to form a limited company it’s our memorandum and articles of association you should check out.
This article is only meant as a guide and does not constitute professional advice. If you are unsure about how to proceed, seek legal counsel.
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27 January 2017 • 1-minute read
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