What Is The Meaning Of A Limited Liability Partnership (LLP)?

A Limited Liability Partnership – or LLP for short – is a kind of business structure. So what is it, and how does it differ from other company structures?

LLPs are a form of a partnership, but unlike traditional partnerships and limited companies, each partner is only liable for the amount of money they invest. This is known as “limited liability”.

This can be an attractive option for a range of businesses, especially professional companies such as accountants, solicitors, and offshore companies.

What Is A Limited Liability Partnership Structure?

The structure is close to a Limited Company, but one significant difference exists. An LLP company is a separate legal entity from its partners, meaning that individual partners (or “members”) are only liable for the money they invest plus any personal guarantees.

Members pay income tax through Self-Assessment, unlike Limited companies, which pay corporation tax.

Benefits Of Forming An LLP

For companies considering setting up an LLP, benefits include:

• Partners’ personal assets are protected under the limited liability structure;
• Members can be a combination of companies and individuals;
• Members have more flexibility on how the business is managed, and profits are shared;
• The trading name is protected through registration at Companies House.

Disadvantages Of Forming An LLP

Some of the disadvantages to be aware of before forming an LLP include:

• All partnership accounts must be filed to Companies House and be available to the public;
• The set-up and administrative costs are often higher than a traditional partnership;
• Profits must be distributed and cannot be held over for future tax years;
• They must have at least two members.

Differences Between An LLP And Other Business Structures

Deciding which type of business structure to choose can be complicated, and there are a range of pros and cons for each. Even for companies within the same sector, one business structure doesn’t always suit everyone, so take time to explore the options.

LLP vs. a Limited Company

One of the key things to consider is how funds are raised, and members are paid. An LLP won’t have any directors, shares or shareholders. So, that may be a better bet if you want to sell shares in the business to raise money.

LLP vs. Limited Partnership (LP)

The structure of an LLP and an LP is similar. The main point of difference is that LPs have at least one general partner and one limited partner – whereas LLPs only have limited partners. This means that all partners have management roles.

Taxes In An LLP Versus A Limited Company

Tax is treated differently in an LLP because it is a separate legal entity from its partners. In a Limited Company, the company pays corporation tax instead of distributing the untaxed profits to members who pay tax on their individual shares.

Setting Up A Limited Liability Partnership

Follow these steps:

1. Choose a name
2. Decide on a registered office address (this will be publicly available)
3. Make sure you have at least two members
4. Draft an agreement
5. Register with Companies House

After registering, you must also file a confirmation statement at least once a year.

Formulating an LLP agreement

You can draft an LLP agreement yourself or get a solicitor to help you. It must set out your members’ responsibilities, how they can join or leave, how decisions are made and how you share the profits.

Incorporation of an LLP

You can register electronically (using approved software), through a third-party agent or by post. Details can be found on the gov.uk website. Once this is done, you’ll receive a certificate of incorporation.

FAQs

What is a good Limited Liability Partnership definition?

A business structure includes at least two members with a management role and are only liable for the amount of money they invest. Members can be individuals or Limited Companies.

When is an LLP better than a company?

An LLP is a good option if you’re starting a business with other people and you’re keen to protect your personal assets in case the business goes into debt. It also gives you more flexibility if you want to add or remove partners later.

Is it a good idea to set up an LLP?

It’s important to find the right business structure for your individual needs as a business. It could be a good fit if you’re looking for a partnership where all members have a management role and are happy for the accounts to be publicly available.

How much tax does an LLP partner pay?

Partners are subject to the same tax rates on the income they receive as employees, sole traders and general partners. From 6 April 2022 to 5 April 2023, these are:

• Up to £12,570 – 0%
• £12,571 to £50,270 – 20%
• £50,271 to £150,000 – 40%
• Over £150,000 – 45%

How does an LLP raise funds?

Initially, partners invest funds into the LLP to get it up and running. If the company needs further investment later down the line – often due to a period of growth – partners may choose to increase their contribution or bring in new partners to invest.

Which is better: an LLP or a Partnership?

There are no hard and fast answers to which business structure is best. However, an LLP may be a better option if the partners in your business want to avoid a situation where they are personally responsible for paying off company debts or liabilities.

Who owns an LLP?

There are no shareholders or directors in an LLP, so it is owned and managed by its members. There must be at least two members, one of whom must be a person, while the other can be an individual or a company.

Why do law firms benefit from becoming an LLP?

Law firms often favour the structure for the extra protection it offers to its partners. For example, if one partner is found guilty of legal negligence, the other partners are not financially liable, and their assets will be protected.