An introduction to limited liability partnerships
- What is a limited liability partnership?
- Who would register an LLP?
- LLP owners
- Limited liability partnership or limited company?
- Pros and cons of limited liability partnerships
- Designated LLP members
- How do I register a limited liability partnership?
- What is a partnership agreement?
- LLP equivalents in other countries
What is a limited liability partnership?
A limited liability partnership, often abbreviated as ‘LLP’, is a type of incorporated business structure that is similar to a limited company, but has many distinctive attributes of a conventional partnership. It is essentially a hybrid of these two business models. LLPs are set up with two or more people who share responsibility for running the business. These members enjoy the flexible management framework, profit allocation and tax benefits of a general partnership structure, but they benefit from the reduced financial liability of a limited company.
When an LLP has been incorporated with Companies House, it acquires independent legal status and provides limited liability to its members, or ‘partners’. This reduced financial responsibility is extremely advantageous, because it protects members’ personal finances beyond their capital contribution or any financial guarantees they have made to the LLP. Financial and legal obligations fall on the LLP itself, rather than its members. This makes a limited liability partnership more appealing than a general partnership in which members are accountable for all financial liabilities of the business.
Who would register an LLP?
This type of business structure is unsuitable for non-profit businesses, social enterprises and charities. It is only appropriate for groups of two or more people who want to generate personal income from the sale of goods and/or services.
As a business owner, a limited liability partnership will provide you with the financial protection of a limited company and the tax-efficiency and flexible nature of a traditional unincorporated partnership. This will be particularly beneficial if you provide professional services as a solicitor, accountant, designer or dentist, for example.
An LLP has two or more partners, known as ‘members’, who collectively own and manage the business. Members can be individuals and/or corporations. In most partnerships, members will jointly share all responsibilities and costs associated with running the partnership, and they will each be entitled to an equal share of any profits. These formal particulars are usually outlined in a partnership agreement.
The financial liability of each LLP owner is limited to the amount they invest in the business, and to any financial guarantee they agree to pay if the LLP is unable to pay its debts.
By law, at least two LLP members should be ‘designated’. These designated members are responsible for carrying out the LLP’s statutory filing and reporting obligations for Companies House and HM Revenue and Customs (HMRC). In many partnerships, all members are designated and share these responsibilities equally.
Limited liability partnership or limited company?
A limited liability partnership is best in the following circumstances:
- You would like to structure your business as a flexible partnership.
- You wish to set up a joint business venture in a regulated profession, for example: legal, accountancy, dental, chartered surveying, dentistry.
- You are currently running your business as a general (unincorporated) partnership, but want to protect your personal finances from potential business liability claims.
- Your existing partnership plans to accept high-value contracts from large corporations.
- Your existing partnership plans to carry out business operations that could potentially lead to liability claims.
A limited company is best in the following circumstances:
- Setting up and running a business on your own.
- Registering your business and company name before you are ready to start trading.
- Setting up a dormant company.
- Employing lots of people.
- Running a non-profit business, social enterprise or charity.
- Raising capital investment.
Pros and cons of limited liability partnerships
If an LLP is sued or encounters financial difficulty, or an LLP member is sued, the personal liability of all members is limited to the capital they have contributed to the partnership.
Financial accounts and members’ details must be disclosed to Companies House and shown on public record.
LLPs are not taxed as corporations like limited companies, so they do not have to pay Corporation Tax. Profits are taxed through Self-Assessment. LLP members pay Income Tax and National Insurance through Self-Assessment on their share of business profits.
Income tax liabilities
Income Tax through Self-Assessment can be as high as 45%, whereas Corporation Tax is charged at a flat rate of 20%.
The internal management structure of an LLP is just as flexible as a traditional partnership. It is easy to make changes to the rights and duties of the partners and alter their capital investment and profit-sharing ratios.
Less favourable tax planning
LLP members have to pay Income Tax in the tax year in which revenue is received. Tax cannot be deferred until a later tax year, when it may be more efficient to withdraw profits.
Even if LLP profits are left in the business as working capital, members still have to pay Income Tax and National Insurance on this money.
Limited liability increases the professional status of a business. This is often more appealing to other businesses and larger corporations, and it’s particularly beneficial when dealing with high-value contracts or carrying out business activities that pose a risk to individuals or the property of others.
Obtaining equity investment is more difficult. There is no share capital structure in an LLP, so you cannot simply sell portions of the business to non-members. Anyone wishing to invest capital in an LLP must be an appointed a member who participates in the running of the business.
LLPs may only accept loan capital from non-members.
Easy to appoint new members
Because there is no share capital in LLPs, there is no need to transfer or issue more shares to bring in new LLP members. The appointment of new members simply requires an agreement with existing members.
LLP details have to be maintained at Companies House and any changes to an LLP must be reported within a certain amount of time.
Financial accounts and annual returns have to be prepared for Companies House each year.
No articles of association
LLPs do not require adopting articles of association to regulate the relationships between members themselves or between members and the LLP.
Internal regulations can be outlined in a partnership agreement at the discretion of the LLP members. This is an optional, private document; therefore, it is very easy for alterations to be made.
If no partnership agreement is drawn up, each member is viewed as having equal rights and responsibilities.
An LLP is legally required to maintain accurate and up-to-date statutory records and registers at its registered office.
Statutory registers and records may be inspected by the public at the registered office of an LLP. Any individual or organisation may request to view these official records (including financial accounts) for any reasonable purpose.
National insurance savings
An LLP has no liability to register as an employer if the only people working through the LLP are members.
There is also no requirement to pay Class 1 Employers’ National Insurance Contributions on any profit paid to LLP members.
Not suitable for everyone
An LLP is unsuitable for carrying out non-profit or charitable activities.
An LLP cannot be set up for the purpose of remaining dormant for an indefinite period of time, because LLPs must be registered with the intention of trading and making a profit.
There is no requirement requirement for decision making by resolution, nor is there any legal requirement to hold board meetings or general meetings.
An LLP must have a registered office address in one UK jurisdiction. LLP members must each provide a service address to receive statutory mail.
Designated LLP members
Two or more partners in an LLP have to be formally nominated as ‘designated members’ during the incorporation process. If no such nominations are made, all members are designated by Companies House.
Designated members are responsible for registering the LLP at Companies House and ensuring the partnership and its members adhere to all statutory requirements. Their duties should be clearly stated in any partnership agreement that is drawn up. These will include:
- Completion of the annual return at least once per year
- Delivering annual returns to Companies House
- Preparing and signing partnership accounts
- Delivering the partnership account to Companies House
- Providing copies of partnership accounts to all members
- The appointment of an accountant and auditor
- Ensuring all members prepare their Self-Assessment tax returns accurately and on time
- Updating statutory records and registers held by the LLP
- Informing Companies House when the LLP’s or members’ particulars change
- Informing Companies House when members join or leave the partnership
- Registering the business for Value Added Tax and PAYE (when necessary)
- Signing contracts and documents on behalf of the business
- Ensuring the LLP’s financial obligations are met
- Acting on behalf of the partnership if it is wound up
How do I register a limited liability partnership?
Limited liability partnerships can be registered through an online company formation agent in as little as three hours and no paperwork, signatures or face-to-face meetings. Simply enter your LLP details on an online application form and send it to Companies House. When your registration has been approved, your LLP will be ready to start trading whenever you are.
To set up an LLP, you will need to provide a unique business name and choose the country where you would like your LLP to be formally registered. You have the choice of England and Wales, Scotland or Northern Ireland. You will also have to provide a registered office address in the same country. This is the address that will be recorded at Companies House for notification purposes and stated on public record.
What is a partnership agreement?
Prior to incorporating an LLP, it is strongly advisable to draw up a partnership agreement, or deed of partnership, to set out the rights and responsibilities of each member. This is a private, optional document. There is no statutory requirement to have this type of agreement or disclose its particulars on public record, but it is essential in practice.
LLP members do not have employee contracts or shares, so a partnership agreement is the best way to clearly set out the terms of the partnership. This will ensure every member is aware of their rights and obligations, regardless of whether these are equal or varied. An agreement usually covers the following matters:
- Name and registered office of business
- Place of business
- Nature of the business
- Requirements of new partners
- Procedures for the admission and exit of partners
- Provisions for the expulsion of members
- Internal management rules and regulations
- Meetings and decision-making
- Members’ capital contributions
- Profit entitlement of each member
- Liability of each member
- Members’ duties, responsibilities and restrictions
- Names of those members who are designated
- Risk management and contingency plans
- Indemnity and expenses
- Insurance policies
- Pension contributions and retirement plans
- Expenses and benefits
- Liquidation procedures
- Legal requirements of LLP
- Entitlement of members upon exit from the LLP
In the absence of a partnership agreement, the default rules set out in the Limited Liability Partnership Regulations 2001 will come into effect. However, these are minimal and typically inadequate to address the types of issues faced by many LLPs.
LLP equivalents in other countries
The LLP structure is still relatively new, so not all countries provide this type of business framework or a comparable variant other than a limited company. However, certain countries that do specifically offer ‘limited liability partnerships' do have similar business models available:
|China||特殊普通合伙 - Special general partnership|
|Greece||Εταιρεία Περιορισμένης Ευθύνης (ΕΠΕ) / Etería Periorisménis Evthínis|
|Japan||有限責任事業組合 / Yūgen sekinin jigyō kumiai|
|Kazakhstan||Жауапкершілігі шектеулі серіктестік Zhaūapkershiliri shekteūli seriktestik (ЖШС) / Товарищество с ограниченной ответственностью Tovarishchestvo s ogranichennoy otvyetstvyennostʼyu (TOO)|
|Romania||Societate civilă profesională cu răspundere limitată|
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