Which structure is better – LLP or a company?
Limited liability partnerships (also known as LLPs) are a relatively new type of business structure, which first appeared after the financial crisis of the late 1980s/early 1990s. We discussed different partnerships structures in our previous blog.
In the UK before 2000, all partners were jointly and severally liable for the firm’s liabilities. That meant that one partner could become liable for the negligent acts of another partner, even if they had never met before or lived on the other side of the world.
Therefore, an LLP hybrid path of a private limited company emerged as a traditional partnership designed to combine a company’s limited liability with the benefits of flexibility, confidentiality and tax transparency provided by unlimited general partnerships.
A general partnership is an informal agreement between two or more individuals and brings no liability protection if exposed to potential claims or other issues. In comparison, an LLP is a formal arrangement that has been lodged with Companies House and has specific rules and regulations attached to it for the management of the business.
The LLP’s structure is popular with professionals who would normally operate as a general partnership, for example as solicitors, doctors, accountants, and architects. LLPs don’t have directors, shareholders or guarantors. Instead, they have members or partners. There must be at least two members to register an LLP but there is no limit of how many memberscan jouin the entity.
The pros of LLPs
The main benefit of an LLP is that it enables individual partners to only be personally liable for the amount they have invested into the business. Their personal assets and income are protected in case the partnership fails, and creditors won’t be able to come after them.
LLP members of a limited company will generally only become personally liable for the debts or liabilities in certain circumstances such as wrongful or fraudulent trading. Despite that, LLPs are taxed in the same way as other partnerships (except for minor differences in the treatment of losses) and is not liable for Corporation Tax (although a company can be a partner).
Individual partners are responsible for their own profits and for paying Income Tax and National Insurance on their individual profits. Therefore the calculation as to whether becoming an LLP or a company is more beneficial taxwise is the same as the comparison with a general partnership.
The benefits come under other ares too such as flexibility. For example, an LLP allows partners to agree on how the profits are divided and not being restricted on the number of shares held. This provides a greater scope to cater to individual needs or tax rates than if the arrangement was through a limited liability company.
The cons of LLPs
One of the disadvantages of becoming an LLP in comparison with a general partnership is the extra administration it brings alongside.
Similarly as with a company, the entity must be registered with Companies House and submit accounts, including the earnings of individual partners. This means the information will be of public record with little or no privacy. In addition, if the LLP has only two members, the partnership will be compulsorily dissolved if one decides to leave.
For more information about LLPs, please visit the official government website.