Many businesses and individuals collaborate to form a partnership agreement where they both take on roles in management and running the new organisation while sharing in the profits and losses.
A limited liability partnership agreement or LLP is designed to provide protection for the partnership agreement in a similar way to limited liability companies.
The big benefit is that it protects the individual partner’s assets and deems the LLP as a legal entity in its own right. The disadvantages are that the partnership needs to publicly disclose its financial details and there are fewer tax advantages compared to setting up an LLC.
There are several different options when setting up a business and each of these has its individual pros and cons. Choosing the right vehicle is key, not only for your personal liability but the amount of tax you pay in your business activities.
What is a limited liability partnership?
Limited liability partnerships were first introduced in 2000 and allowed businesses and individual partners to create a separate legal entity that could be registered with Companies House in a similar way to limited companies.
Limited liability partnerships are generally formed between groups of people or businesses that have a common professional background or mutual. For example, you might have two or more accountants or solicitors who work together but are responsible for their own income and want the protection of limited liability partnership status.
An LLP, as it is more commonly known, means that individual partners are liable only for the amount they have put into the business. Their personal assets and income are protected and, if the partnership fails, creditors cannot come after these.
How is a limited liability partnership formed?
All LLPs need to be registered with Companies House and there needs to be a minimum of 2 members. In any partnership, 2 members also need to act to ensure that all regulations associated with the business are met, including sending accounts to Companies House.
The partnership must have a full postal address in the location where the LLP is registered and details of persons with significant control or PSCs should be made public. In addition, the HMRC must be informed of the partnership and a Partnership Tax Return needs to be filed annually.
Finally, members of an LLP must be registered for self-assessment tax return and pay tax on the income that they earn.
Why are they different to partnerships and limited companies?
A general partnership is an informal agreement between two or more individuals and there is no liability protection when it comes to exposure to potential claims or other issues. In other words, general partners can have unlimited liability while for those in an LLP it is limited.
An LLP is a formal arrangement that has been lodged with Companies House and has certain rules and regulations attached to it for the management of the business.
While a limited company and an LLP have similarities such as being a separate legal entity, there are some major differences. For a start, participants in an LLP are called members or partners and not directors, shareholders or guarantors.
They are governed by different regulations.
While limited companies are subject to the Companies Act 2006, limited liability partnerships are regulated by:
- Limited Liability Partnership Act 2000
- The Limited Liability Partnerships Regulations 2009
Partnerships, unlike a limited company, are not subject to corporation tax but each member is liable for the income tax and national insurance on the amount they earn.
What are the advantages of a limited liability partnership?
1. LLP protection
The huge advantage of forming an LLP is that it gives liability protection to individuals within the group as it is a separate legal entity. That means that individual members are liable only for the amount that they put into the business and assets like their own property are not at risk.
An LLP allows members within the partnership to agree together on how the business will be run and the way profits are divided. This gives greater scope to cater to individual needs than if the arrangement was through a limited liability company.
One of the other main reasons for opting for LLP status is that it can make your collective businesses more attractive to potential clients. It can widen opportunities, for example, for tendering to larger companies who are looking for businesses or partnerships that are formally registered with Companies House.
4. Retain profits
Individual partners are responsible for their own profits and can obtain certain tax benefits from being self-employed while still benefiting from membership of a partnership.
What are the disadvantages of a limited liability partnership?
1. Public disclosure
As with a LLC registered with companies house, LLPs have to submit accounts, including the earnings of individual partners. This will be part of the public record and there is little or no privacy.
If the LLP is only comprised of two members, if one decides to leave then the partnership will need to be dissolved and removed from Companies House.
Each member of a partnership will be taxed according to their income and there are fewer tax breaks than, for example, an LLC might enjoy. Also unlike an LLC, you can’t hold over profits to the next accounting year for tax purposes.
Frequently Asked Questions
What are the characteristics of LLP?
The main characteristic is that an LLP is a separate legal entity from the partners that reduce their exposure to liability and is registered with Companies House.
There must be two designated members who are responsible for ensuring the LLP meets its obligations under current regulations and each member is responsible for their own tax liability.
Who cannot partner in LLP?
Members of an LLP can be either individuals or a corporate entity. This type of structure is only available to businesses that intend to make a profit so is not suitable for charities or non-profit organisations.
Can an LLP have a CEO?
There is often no need to appoint a CEO for an LLP but a lot will depend on the scope and scale of the partnership. A CEO can be nominated with the agreement between members to oversee the management of the partnership as a whole. It is entirely up to the members.
Setting up an LLP has several advantages, not least in reducing the liability of members within the partnership. LLPs are most often used in sectors such as accounting, law and construction where grouping together can provide beneficial security as well as access to more resources compared to general partnerships.