Guide to Limited Liability Partnerships (LLP)

Limited liability partnerships are a business structure that can offer significant advantages over trading purely as a sole trader or as a general partnership. An LLP offers advantages of both a limited company and a general partnership. Limited liability partnerships are a separate legal entity with unlimited legal obligations.

In this guide to Limited Liability Partnership (LLP), we’ll explain what a limited liability partnership is, how it differs from a general partnership and a limited company and the advantages and disadvantages an LLP can offer.

What is a Limited Liability Partnership (LLP)?

Limited Liability Partnerships or LLP’s as they are known were introduced in 2000 by the Partnerships Act 2000 to provide partnerships with limited personal liability that was previously only available to companies.

An LLP is a form of legal business structure in the UK that is very popular among business owners especially in professional services firms in sectors such as accountancy, legal, architecture and consultancy or people like medical practitioners.

A Limited Liability company limits the liability of their designated members to their investments, ensuring that personal assets are safeguarded. Whereas limited companies and their shareholders have their liability limited to the amount unpaid on their shares.

A Limited liability partnership provides the benefits of a private limited company (such as limited liability and separate legal entity) along with flexibility offered by a traditional partnership agreement.

The owners of an LLP, known as LLP designated members or LLP members, have limited liability for its debts. However, for tax purposes the individual LLP members are taxed like sole traders/partners on their share of profits.

When to choose a Limited Liability Partnership

If your business currently operates as a traditional partnership, then an LLP could be an ideal next step to structure your business.

Limited Liability Partnerships work well for businesses that are involved in high-risk services or where claims for damages could be made. This is why businesses operating in professional services, consultancy or medicine tend to use an LLP structure.

When to choose a limited company

There are some great benefits to a limited company. For example, there can be tax advantages as Corporation Tax rates can sometimes be lower than income tax rates etc. Also, if you wish to raise capital by selling shares in your business or you will grow and will employ lots of people where the payroll will be higher than the owners’ salaries, then a private company limited by shares is ideal for tax efficiency.

How to set up a Limited Liability Partnership

Choose a name

As with limited companies, you need to select a suitable name for your Limited Liability Partnership. It needs to be unique and not already in use by another business registered at Companies House.

A Limited Liability Partnership must be incorporated with a name ending with “Limited Liability Partnership” or “LLP”.

Appoint designated members

Limited Liability Partnerships are owned by LLP members. Limited Liability Partnerships must be registered with a minimum of two designated members (or at least two partners) that ensure compliance with legal obligations.

There is no upper limit to the amount of other members a Limited Liability Partnership can have.

A Limited Liability Partnership is a separate legal entity from its members and therefore provides protection for its members against personal liability for business debts.

Appoint Persons with Significant Control

A PSC is a person with significant control or significant influence over the business, whether through an ownership stake or some other means.

For a typical LLP where all members are designated then each member will be a PSC. LLPs are required to keep the information on their PSC register up-to-date and failing to do so is a criminal offence.

Registered office address

As with limited companies, an LLP is registered with Companies House and must have a registered office address.

The address you register must be a physical address in the UK and in the same country where it was incorporated i.e. England and Wales, Scotland, or Northern Ireland.

A registered office address is used for official correspondence and can be used to receive statutory letters from authorities like Companies House and HMRC.

Register with Companies House

All LLPs have to be registered with Companies House. The incorporation process and registration process are quite straightforward. This can be done by yourself online or by using a formation agent such as dns accountants.

Pay your registration fee

You will need to pay a registration fee when registering your LLP at Companies House. It is cheaper to register your LLP online, rather than by post.

Certificate of incorporation

Once Registrar of Companies approves the registration, you will receive a Certificate of Incorporation, confirming that your LLP is officially registered and legally recognised.

Draft LLP agreement

An LLP agreement is sometimes referred to as a limited liability partnership agreement, deed or partnership, members’ agreement, or partnership agreement.

LLP members don’t have a legal obligation to draft and enter into a formal agreement, however, it’s strongly recommended.

An LLP agreement normally outlines some basics such as the LLP name registered at Companies House, registration number, registered office address, alternative trading names, nature of business etc.

It will also cover things like names of all the partners, rights and responsibilities of ordinary members and designated members

Other areas can be covered in the LLP agreement such as profit sharing and remuneration arrangements, capital investment and non-financial contributions of partners, ownership and control for each partner.

Register for taxes

Unlike limited companies, LLPs dont generally pay corporation tax. Individual partners of the LLP are taxed and will pay income tax on their share of the LLP’s profits.

You will also need to consider registering for VAT (Value Added Tax), this can be voluntary, or you must register if either:

• your total taxable turnover for the last 12 months goes over £90,000 (the VAT threshold)
• you expect your taxable turnover to go over £90,000 in the next 30 day

You normally need to register as an employer with HM Revenue and Customs (HMRC) when you start employing staff or using subcontractors for construction work.

Seek professional advice to ensure you are correctly registered for tax. Tax efficiency is important when running an LLP, so hire an accountant such as dns accountants to advise you on tax reliefs and tax savings.

How long does it take to form an LLP?

Using a company formation agent’s online services such as dns accountants, an LLP can be formed within 24 hours.

Who owns an LLP?

Limited Liability partnerships are owned by the LLP members. An LLP must have at least two members (there is no upper statutory limit to the number of designated members).

Maintaining compliance

Limited Liability Partnerships come with additional legal responsibilities over operating as a sole trader.

There are certain compliance duties required to adhere to legal requirements for an LLP. These compliance requirements include filing annual accounts and annual confirmation statements, and maintaining proper accounting records, and complying with tax obligations.

How is a limited liability partnership different from a limited company?

Limited partnerships are very different to run than a company limited by shares in terms of their flexibility, internal management structure, financial responsibility and how they pay tax.

LLPs are generally easier to set up and run compared to private limited companies with regard to reporting requirements as there is a lower compliance burden.

In terms of public records, there are differences between companies and LLPs as limited companies must file things like articles of association at Companies House, company tax returns and hold and minute shareholder meetings.

Limited companies are regulated by the Companies Act that is more rigid compared to partnerships governed by the Limited Liability Partnership Act. For example, limited companies face regulations that do not exist for partnerships, when awarding or selling shares or options to employees and directors.

The exit route for a partner from an LLP is also easier than a director of a limited company for tax purposes. For example, in a partnership the transfer of an interest to another partner will not trigger a disposal for capital gains tax purposes unless the partner makes a gain on his capital account. The transfer of shares in a company at a profit will trigger a disposal for capital gains tax purposes on which capital gains tax is payable.

Limited Liability Partnerships advantages & disadvantages

Using an LLP structure can have several advantages over other business structures such as general partnerships and limited companies. However, there are also some disadvantages you need to be aware of before setting up an LLP. Below we will look in more detail at the advantages and disadvantages of an LLP structure.

What are the advantages of limited liability partnerships?

Limited liability protection

One of the most significant advantages of an LLP is the limited liability it offers.

An LLP is a separate legal entity to its members or partners.

Limited liability protection protects the member’s/partner’s personal assets from the liabilities of the business. This means that should the business incur business debts or face legal action; an LLP member will not be personally liable for the debt or for the outcome of the legal action.

Members of an LLP are generally only liable to the extent of their capital contributions to the partnership.

However, it is worth noting that this limited liability protection can be eroded if the LLP becomes insolvent. With regard to an insolvent LLP, members may become liable for tax debts or repayment of drawings, so advice should be sought.

Tax advantages of an LLP

LLPs are generally taxed as a partnership, meaning they do not pay tax on profits such as corporation tax which a limited company has to pay. Instead, LLP members are taxed like sole traders/partners on their profits. The profits are distributed to the partners, who report them on their personal self-assessment tax returns and will be paying income tax on them. This can provide significant tax benefits to businesses trading as LLPs, such as on National Insurance contributions (NICs), benefits in kind, and taxation of profits.

LLP partners can receive a combination of both profit share and salary. Partners can choose to take a lower salary in exchange for a higher profit share or vice versa. If the partners of the LLP are in a lower tax bracket than a business would be for corporation tax, then these tax benefits can be maximised.

LLP members must register with HMRC for Self Assessment, file an annual Self Assessment tax return, and pay Income Tax and National Insurance contributions (NIC) on the earnings they receive from the LLP and any earnings from other sources.

Easy set up

Forming an LLP in the UK is a fairly straightforward and inexpensive process, especially when using the services of an online company formation agent such as dns accountants.

Typically, most online applications are processed and approved by Companies House within 24 hours.

Professional reputation and credibility

An LLP can provide added credibility and professionalism, particularly compared to someone operating as a sole trader. If you are looking to take on government contracts, establish a strong brand or attract new clients and potential investors, then this may be critical to these factors.

Protection of company name

Once your LLP is incorporated at Companies House, your company name is legally protected. No other Limited Liability Partnership or company can be registered with Companies House with the same or similar name or one that is similar. A traditional partnership or sole trader does not get the same level of protection for their business names.

Public disclosure of information

LLPs and limited companies are subject to many of the same disclosure requirements. This includes filing annual accounts, confirmation statements and maintenance of statutory registers. However, LLPs benefit from additional confidentiality with regard to internal arrangements.

Whilst a limited company’s information e.g. Articles of Association are publicly available at Companies House, an LLP’s version of this i.e. a Members’ Agreement remains private and is not publicly disclosed.

Flexibility

LLPs can be managed by the members/partners themselves, unlike limited companies, which must have a board of directors and official officers.

There are also no upper restrictions on the number or type of partners that can be involved in a LLP, making it a flexible option for businesses with multiple owners or partners.

An LLP also provides flexibility in profit sharing arrangements. A company is restricted by the shareholding arrangements and moving shares or equity between shareholders is likely to give rise to a tax charge under the share related remuneration rules. LLP members, however, can vary profit sharing arrangements from year to year with complete flexibility and can also increase the equity interest of new members without any tax charges.

Capital requirement

A partner in an LLP can be via a small amount of capital or no capital as there is no minimum capital requirement in an LLP. However, members of an LLP only enjoy limited liability up to the amount of their contributions to the LLP.

What are the disadvantages of an LLP?

LLP reporting requirements & public record disclosure

LLPs have more complexity and more company reporting obligations to fulfil than a traditional partnership or sole trader, but less than a company limited by shares. These reporting obligations include:

• preparing and filing LLP accounts to Companies House
• maintaining a registered office address
• maintaining statutory LLP registers, including a PSC register
• Registering the LLP for VAT if applicable
• filing an annual confirmation statement
• informing HMRC and Companies House of changes to the LLP for example members details or registered office address

Profit allocation & retention

Profit cannot be retained in an LLP in the same way as a company limited by shares or other business structures. This means all earned profit needs to be distributed with no flexibility to hold over profit to a future tax year.

Tax efficiency

R&D tax relief is only available to limited companies, so most LLPs will be unable to claim tax reliefs such as R&D tax credits.

Tax relief on capital expenditure such as plant and machinery can also be an issue for an LLP depending on it’s structure. Businesses limited by shares can normally claim the Annual Investment Allowance (AIA) on capital expenditure such as plant and machinery. AIA provides a deduction of 100% of qualifying expenditure in the year of purchase. If an LLP is made up solely of individual members, then it will be able to claim the AIA. However, if the LLP has any non-individual members, such as a company or a trust, then it cannot claim the AIA

Therefore, if your business is likely to invest in R&D or plant and machinery now or in the future an LLP business structure may not be right for you. Seek professional advice.

Raising capital

Some potential investors may not invest in an LLP because LLPs only offer limited liability protection, meaning raising additional capital for an LLP may be harder.

LLP longevity

LLPs must have a minimum of two designated members at all times. If an LLP partner dies or leaves, then the LLP will need to be dissolved and reformed with new partners/members. This can affect the longevity of an LLP and place additional burden on members to reform a new partnership or find additional members.

Summary

Setting up as an LLP can be the right structure if you’re planning to go into business with other people.

LLPs are often an attractive tax option for many businesses due to the increasing corporation and dividend tax rates and the other tax benefits that LLPs may offer.

LLPs have many other advantages including:

• Flexibility
• Limited liability for members
• Easy set up
• Increased credibility

The structure you choose for your business will depend on your circumstances. However, professional advice should be sought when setting up an LLP to ensure it is the right option for your company today and in the future.

For more help and advice on LLPs and other types of business structure, contact dns on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

FAQs about LLPs

What is the difference between an LLP and a traditional partnership?

A partnership is a number of individuals carrying out business together. A partnership has no separate legal identity and each partner, usually, has unlimited liability. An LLP has a separate legal identity and the members (or partners) generally have limited liability.

Can an LLP be dormant?

Yes, an LLP can be dormant if it has no ‘significant accounting transactions’ during an accounting period.

What happens if an LLP member becomes insolvent or is disqualified?-

Where a member of an LLP is wound-up or is made bankrupt, they cannot participate in the management of an LLP.

Where a member is subject to a disqualification order/undertaking or bankruptcy order/undertaking he/she is barred from being a member or taking part in the management of an LLP without the agreement of the court.

Can I register a limited liability partnership as a charity?

Limited Liability Partnerships can only be registered if they intend to make a profit (i.e. to run as a profitable business), so you cannot set up an LLP for non-profit or charitable purposes.

Other company structures can be used to run a charity or not-for-profit organisation.

Can I appoint a MD or CEO to my LLP?

There is no legal obligation for an LLP to assign specific roles or titles to the members or employees of the LLP. It is entirely up to the LLP members whether they choose to define such roles. An LLP can employ individuals to fulfil these roles on their behalf if they so wish.

Can an LLP own assets?

As a corporate body, an LLP may own assets in the same way a limited company owns assets.

Should the LLP go into receivership, the official receiver will use the accounting records, accounts, LLP partnership agreement and other records to define whether the assets (belong to the LLP or the individual members.

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