LLPs are business structures that combine aspects of partnerships and limited liability companies. In 2001, the Limited Liability Partnership Act 2000 made it possible to form an LLP in the UK. For industry professionals such as accountants and solicitors, who most often operate as partnerships, the LLP is the most popular incorporated business structure. Find more about llp registration requirements.
Limited liability partnerships have many benefits
A limited liability partnership combines some of the advantages of both a regular partnership and a limited company. Partnerships and companies combine their flexibility and financial protection in this type of business entity. An LLP has the following specific benefits:
Limited liability – Regular partnerships carry financial risks for each partner, whereas LLPs restrict each partner’s personal liability for losses (e.g. in the event of insolvency).
Distribution of profits – The profits of LLPs can be allocated on a discretionary basis unlike the profits of limited companies, where they are allocated according to shareholding percentages. LLPs are also more free to distribute other distributions (e.g. advance loans and returning capital to members) and are not restricted by capital maintenance rules.
Tax efficiency – Partnerships with limited liability are not subject to corporation tax. The downside is that profits cannot be ploughed back into the business (as is the case with limited companies); all profits are subject to income tax.
Flexibility – A LLP’s internal structure is more flexible than that of a limited company. When members are appointed or removed, or their rights and duties are altered, there is less formality involved. In addition, shareholder meetings and associated resolutions are not necessary for decisions to be made. The LLP Agreement allows a new member to be introduced by simple execution of a deed of adherence.
Confidentiality – Members’ agreements (also called LLP agreements) can be kept private, unlike limited company articles of association, which must be filed with Companies House.
LLPs differ from limited liability companies in what ways?
Here are some similarities and differences between limited liability companies and limited liability partnerships:
Limited liability – It is clear that the members (directors or partners) of both business entities are generally not personally liable for the organization’s debts.
Legal personality – Limited companies and limited liability partnerships are considered to be legal entities in their own right. Business entities can enter into contracts and be held accountable instead of individuals.
Formation – The official administrative process involved in setting up an LLP and a limited company is very similar. Both must be registered with Companies House and abide by company name rules.
Insolvency – LLPs are subject to similar insolvency rules as limited liability companies. Voluntary arrangements can be proposed, administration orders can be sought, voluntary liquidations can be resolved, etc.
Floating charges – The assets of an LLP may be charged with fixed charges and floating charges, as they are with limited companies.
While there are many similarities between the two, there are also some important differences:
Shares – There are no shareholders or share capital in limited liability partnerships, unlike companies. Members’ Agreements (LLP Agreements) usually document profit distributions. It also defines the decision-making process, the relationship between the partners (members) and the LLP.
Flexibility – The internal structure of an LLP is generally more flexible and informal than that of a limited company, as there are no articles of association. It is a private document that does not have to be shared with Companies House.
Tax – In spite of being treated as a separate legal entity, LLPs are taxed in the same way as traditional partnerships. The members of the partnership (partners) are each responsible for paying tax on their own share of the business’s profits. LLPs do not pay corporation tax, but limited companies whose members are LLPs have to pay corporation tax.