What Is a Limited Liability Partnership (LLP)?

Like a limited company, an LLP structure is a form of incorporated business governed by the Limited Liability Partnerships Act 2000. It is suitable for professions traditionally operating as general partnerships, such as law firms, accountants, dental practitioners, etc. Upon registering with Companies House, an LLP becomes a separate legal person capable of suing or being sued, offering limited liability protection to its members.

What does limited liability protection mean?

Limited liability protection is a legal concept that provides a significant benefit to business owners. It means that the owners, shareholders, or members of a business entity will not be held personally responsible for the business’s debts, liabilities, or legal obligations. In simple terms, if the company faces financial difficulties or legal issues, the owner’s personal assets are generally protected from being used to settle the business’s obligations.

Limited liability is fundamental to many business structures, such as limited liability companies (LTDs) and corporations. It encourages entrepreneurship and investment by mitigating the risks associated with business ownership.

Who can be an llp member?

LLPs consist of at least two entities, individuals or body corporates (including other LLPs), and Scottish partnerships registered with Companies House as members. The members establish the terms of their partnership through an LLP partnership agreement, which outlines —

• The business structure by defining the roles and responsibilities of the members.
• Designation of specific members as designated members, nominee members or ordinary members.
• Ownership stakes and revenue-sharing arrangements.

In cases where a partnership agreement is absent, the provisions of the Partnership Act 1890 will govern the members.

When Is Forming a Limited Liability Partnership the Best Option?

Consider forming an LLP if you —

• ntend to maintain your self-assessment tax status but limit personal liability to your capital investment.
• Are a lawyer, dentist, or chartered accountant who wants to establish a joint venture with another professional.
• Run a sole proprietorship or an ordinary partnership, and you wish to leverage the legal protections of an LLP.
• Business dynamics are changing, and your current partnership offers to perform business functions that could most likely result in liability claims.
• Your current partnership intends to accept high-value contracts from larger corporations.

Further reading: Sole Trader (or Sole Proprietorship) Explained

When Is a Limited Company the Best Option?

Conversely, forming a limited company may be advisable when you want to —

• Establish and operate a business independently.
• Protect your company name using a dormant company as part of your preparations to go into business soon.
• Register a dormant company to act as your partner in an LLP.
• Raising capital investment.

What Are the Benefits of an LLP?

An LLP is an attractive option for entrepreneurs because it offers the same protection as a business limited by shares and the flexibility of a partnership in terms of tax and management. The top 6 benefits include —

1. Limit on liability (business risk exposure) — Whenever a limited liability company encounters financial issues and becomes insolvent, the members’ liability is limited to their capital investment.
2. Flexibility and ease of adopting new llp members or partners — The internal administrative structure of an llp is just as versatile as that of a general partnership. You can easily modify the legal rights and responsibilities of the partners and change their capital investment and profit-sharing ratios. It is this flexibility that makes it an ideal choice for professional firms that may need to frequently adjust ownership ratios as incentives for their staff.Because LLPs do not have share capital, transferring or issuing additional shares is unnecessary to attract new members. Such an appointment only requires the agreement of the existing partners.
3. Professional reputation — A limited liability partnership enhances a venture’s professional standing. LLPs are frequently more desirable to other companies and larger corporations, and they are especially advantageous for those who engage in high-value contracts.
4. No articles of association and shareholders’ agreement — LLPs are not required to adopt articles of association to regulate the relationship between members. Internal regulations can be outlined in an LLP agreement according to terms reached by the members. However, the deal is an optional, private document, making alterations a simple process. If no partnership contract is drawn up, every member is viewed as having equal rights and responsibilities. However, the partnership will automatically dissolve without a formal agreement if one partner resigns, retires, becomes bankrupt, or dies.
5. National insurance savings — An llp has fewer employer obligations if the people working in it are its members. However, there is a distinction between salaried and non-salaried members. Salaried members are treated as employees for tax and National Insurance (NI) purposes if they meet specific conditions related to significant influence, disguised salary, and capital contributions.For non-salaried members, the LLP is not required to pay Class 1 Employers’ National Insurance Contributions on any profit paid to them. However, for salaried members, the LLP is required to pay National Insurance Contributions through PAYE.
6. Fewer formalities — There is no legal requirement to hold board meetings or general meetings.

What Are the Disadvantages of an LLP?

LLPs have increased regulatory compliance requirements, leading to higher administrative costs than alternative partnership structures like general or limited partnerships. Additional disadvantages encompass—

1. Privacy — Financial accounts and members’ details must be disclosed to the Registrar and shown on public records.
2. Income Tax liabilities — According to HM Revenue & Customs, self assessment for the tax year 2023-2024 is currently at 45% for those earning over £150,000 per year, with the basic rate starting at 20% for the £12,571 – £50,270 income bracket. In contrast, the corporation tax is charged at a flat rate of 19%.
3. Less effective tax planning — Members of a Limited Liability Partnership (LLP) must pay Income Tax in the tax year when income is earned. Suppose an LLP retains its profits as working capital. In that case, partners must still pay Income Tax and National Insurance on their share, unlike in a Limited Company (LTD), where directors can choose when to extract profits, potentially opting for a more advantageous financial year for tax purposes.
4. Investment opportunities — Because an LLP has no share capital structure, it cannot simply sell portions of its business to non-members. Anyone wishing to invest capital in an LLP must be an appointed member participating in the company’s management.
5. Reporting regulations — The entity’s details must be maintained at Companies House, and any changes must be reported within a certain period. Financial accounts and annual returns must be prepared for submission to the Registrar each year.
6. Statutory records — An LLP is legally required to maintain accurate and updated statutory records and registers at its registered office and allow the public to inspect upon proper request. Any individual or organisation may request to view these official records (including financial accounts) for any reasonable purpose.
7. Not suitable for everyone — A limited liability partnership is unsuitable for non-profit or charitable activities. If you wish to register a non-profit, consider forming a company limited by guarantee, a charitable incorporated organisation (CIO), or an unincorporated charitable association. Further, a limited liability partnership cannot be set up to be dormant but should only be incorporated if the objective is to actively trade and make a profit.

See also: How Shelf Companies Lost Their Appeal and What to Do Now

How Can I Set up an LLP With Companies House?

Limited liability partnerships are generally registered online, and Your Company Formations can set you up within three hours (without any documents, signatures, or personal meetings). Simply enter your LLP information details on our web-based application through our portal, and we’ll post it to the Registrar of Companies. Once your registration is approved, you will receive a certificate of incorporation, and your limited liability partnership can commence trading.

You must provide a distinct business name and select the country where you prefer your limited liability partnership to be formally registered (Scotland, England and Wales, or Northern Ireland). Likewise, you must have a registered office address in the same country. This address will be publicly documented at the Registrar and used by government agencies to send statutory notifications.

How can I register my UK LLP business for self assessment?

Like limited companies, you do not need to register your LLP for self assessment. Companies House will inform HMRC of the existence of your business. They will then create a tax record and a corresponding partnership unique taxpayer reference number.

What is the role of designated members of the LLP?

Designated llp members are responsible for registering the limited liability partnership with the Registrar of Companies and ensuring the partnership and its members adhere to all statutory requirements. Their duties should be clearly stated in a partnership agreement. Such responsibilities shall include:

• Completing and delivering annual returns to Companies House
• Preparing, signing and delivering partnership accounts to HMRC
• Providing copies of partnership accounts to all members.
• Selection of the auditor and an accountant
• Updating the statutory records and registers in the limited liability partnership’s custody
• Ensuring every member correctly files their Self-Assessment tax returns on time
• Keeping Companies House updated whenever the LLP’s or members’ details change, members leave or join the venture
• Enrolling the business for VAT and PAYE (as needed)
• Signing agreements and documents in favour of the enterprise
• Making sure all obligations are satisfied
• Working on behalf of the LLP in response to any winding-up scenario.

Why do I need a registered office address for my LLP business in the UK?

You need a registered office address for your LLP in the same part of the UK where it is incorporated—England and Wales, Scotland, or Northern Ireland. The address serves as the official correspondence address and is used to receive important statutory letters from authorities like Companies House and HMRC, particularly concerning legal compliance and other obligations.

Do LLPs Pay Corporation Tax?

Though LLPs have limited liability, the venture is not considered an entity separate from its owners for tax purposes. Members pay for national insurance and tax on profits via self-assessment based on their share of the business’s profits. Unlike an LTD, which is double-taxed when the company taxes profits and the shareholders and directors are taxed on dividends and salaries.

Can a General Partnership (GP) Convert to an LLP?

Yes. If you are currently in a traditional partnership, you can incorporate a UK LLP and execute a transfer agreement that conveys the business from the GP to the LLP.

Having done this, you’ll need to dissolve the former partnership by having one of the partners submit a notice to exit or, according to the stipulations of your partnership agreement.

How Can a Sole Proprietorship Convert to an LLP?

An LLP must have at least two members. Therefore, a sole proprietor can register a dormant company and have it as the second member in the LLP, provided the dormant company doesn’t carry out any income-generating activities. After forming the company, tell HMRC that the new business is dormant for company tax. Once you do this, you maintain your self-assessment tax status and enjoy the convenience of doing business as an LLP.

Read: What Is a Dormant Company?

Limited Liability Partnership (LLP) Vs. Traditional Partnership

The term “partnership” refers to a business structure comprising two or more individuals, an individual, and a company or two companies who come together with a view of making a profit. Such a business can function as a traditional partnership, a general or ordinary partnership or an LLP.

The critical difference between the two rests in the financial responsibility of the partners and the extent to which one partner is liable for the independent or unauthorised actions of the other(s).

In a traditional partnership established under the UK Partnership Act 1890, liability isn’t capped (unlimited). The partners are personally liable and equally bear the full legal responsibility for business debts and risks. If the business cannot settle its debt or any other legal obligation, a court may order the seizing and selling of the members’ private assets.

In contrast, partners’ responsibility in a limited arrangement is capped to their capital contribution, meaning the members of an LLP do not worry about losing their private assets if the company fails. In terms of the actions of other partners, all partners are liable for the actions of all other partners in a GP. While in an LLP, partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

What Is the Difference Between an LLP and a Limited Liability Company (LLP and LTD) (Infographic Image)?

LLPs and private limited companies must be incorporated at Companies House under the Companies Act 2006 and the LLP Act 2000, respectively. They both share several similarities and differences.

* These are new changes introduced by the Economic Crime and Corporate Transparency Act (2023).

Read also: How to Register for Self Assessment Tax Return Using HMRC SA1 Form

Conclusion

It’s not difficult to register a limited liability partnership structure, and even though you are not legally required to have one, you should take the time to write down a partnership contract or partnership deed to indicate the rights and obligations of each member.

Important gov.uk partnership resources

• Partnership Tax Return Guide Notes 2022
• Register a limited partnership with Companies House
• Register a business partnership with HMRC
• HMRC partnership manual
• Limited liability partnership (LLP) strike off, dissolution and restoration
• Companies House: guidance for limited companies, partnerships and other company types
• Limited Liability Partnership Regulations 2001
• The Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009.https://www.legislation.gov.uk/uksi/2009/1804/contents/made

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