A limited liability partnership (LLP) is a business model that shares some characteristics with both a limited company and a regular partnership while possessing unique features of its own.
In terms of company structures, LLPs are relatively new in the UK and were first introduced in 2000 by the Partnership Act. So, what type of businesses would typically incorporate via an LLP, and what particular benefits does this model offer? What, if any are the disadvantages of this type of company structure? Here we offer a brief guide to LLPs.
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.
Once the LLP is incorporated at Companies House it becomes a legal entity and offers members limited liability. In other words, the personal assets of members are largely protected from any liability that arises from the business itself. In an LLP, members’ earnings are treated as personal income.
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 will appeal to partners who want their individual earning to be defined and not added to a single company pot to be distributed by dividend. It will appeal to contractors, 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
Some advantages the LLP structure offers are as follows:
• 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 to the members and it can buy or lease property, take on 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 who are engaging the services of the LLP and not individual members as such. 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.
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 2 NICs and Class 4 NICs.
• 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.
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.
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.