What is a limited liability partnership (LLP)?

A limited liability partnership (LLP) is a business model that shares some characteristics with a limited company and a regular partnership while possessing unique features.

LLPs are relatively new company structures in the UK. The Partnership Act first introduced them in 2000.

Since their introduction, LLPs have become a popular choice for professional services providers requiring collaboration, such as law, accounting, and consultancy.

So, what type of businesses would typically incorporate via an LLP, and what specific benefits does this model offer?

What, if any, are the disadvantages of this type of company structure?

Find out more in our brief guide to Limited Liability Partnerships.

LLP structure

LLPs are formed by at least two designated partners who share duties and responsibilities for running the company.

The particulars of the partnership, including each member’s financial contribution, their share of profits and any guarantees members agree to pay if the LLP can’t cover its debts etc., will usually be set out in a formal partnership contract.

It is also advisable to include provisions for dispute resolution, the admission of new members, and procedures for members exiting the LLP.

Once the LLP is incorporated at Companies House it becomes a legal entity and offers members limited liability.

In other words, members’ personal assets are largely protected from any liability that arises from the business itself. In an LLP, members’ earnings are treated as personal income.

Partners’ responsibilities

In contrast to common partnerships, where members are responsible for all the bills, all the legal and financial obligations in LLPs rest mainly with the company itself.

The members or partners jointly own and run the enterprise and are responsible for fulfilling the statutory reporting duties to Companies House and filing annual returns with HMRC.

In practice, these duties may be shared equally by the LLP partners.

The appeal of an LLP

LLPs appeal to partners who want their individual earnings to be defined and not added to a single company pot to be distributed via dividends.

This business structure will appeal to entrepreneurs and other professionals, such as designers, solicitors, accountants, etc., who want to enjoy the benefits of a limited company and the flexibility of an unincorporated partnership.

Some benefits of an LLP

• Members’ personal assets are protected. If a LLP runs into financial trouble, the liability of each member is restricted to the money they’ve put into the partnership.
• LLPs are treated as a separate legal entity from their members. They can buy or lease property, hire staff, and agree contracts with clients.
• Greater flexibility. The operation of the LLP, including distribution of profits, is agreed in the original partnership contract but it can be modified at any time, for example, if a member wants to increase his or her capital investment.
• Limited liability lowers the risk for clients or agencies engaging the services of the LLP rather than individual members. This means the individual or contractor working via an LLP can’t claim employment rights from the client.
• There is no share capital in an LLP, making it easier to appoint new members as there is no need to issue more shares or transfer ownership of shares.
• LLPs do not pay Corporation Tax as members are self-assessed.
• The decision-making process is simplified because there is no requirement for formal resolutions, AGMs or board meetings. This makes LLPs particularly attractive for fast-moving industries where decisions must be made quickly.

Some disadvantages of an LLP

• Income is taxed via self-assessment and members of an LLP are treated the same as sole-traders, general partners and company employees, unless they are registered as a company. This means partners could pay higher rates of overall tax compared to director/shareholders of limited companies.
• Members also pay Class 4 NICs – and possibly Class 2 NICs (these are voluntary).
• All financial accounts are submitted to Companies House and are shown on the public record.
• Profit can’t be retained/held over for a future tax year; nor can tax be postponed.
• If an LLP has two designated members and one decides to leave, the LLP will have to be dissolved. However, this can often be avoided by planning ahead and specifying succession arrangements in the partnership agreement.

What’s in a name?

Members can register an LLP using their own names, such as Bruce & Brown LLP, or use a descriptive name, such as IT Enterprises LLP, for example.

By registering the name at Companies House, you protect the partnership name as no other partnership can use the same name.

This protection can also extend to preventing misuse of the LLP’s name by competitors.

Expert advice

The above list of benefits and disadvantages is not exhaustive, so always get professional advice before deciding if an LLP is for you. For more information, see https://www.gov.uk/guidance/set-up-and-run-a-limited-liability-partnership-llp.