If you’re considering starting a business in the UK, it’s essential to understand your options for structuring it. One popular choice for businesses and partnerships is a limited liability partnership (LLP). But what exactly does LLP mean, and how does it differ from other business structures like limited companies? In this guide, we’ll explain the meaning of an LLP, explore its advantages and disadvantages, and outline the process of setting one up.
What is an LLP?
An LLP (Limited Liability Partnership) is a business structure that offers the flexibility of a traditional partnership with the added protection of limited liability. This means partners can run the business together, but their personal assets are typically shielded from the company’s debts. Introduced in the UK under the Limited Liability Partnerships Act 2000, an LLP is ideal for professionals like lawyers, accountants, and consultants who want to share responsibilities while managing financial risk.
Key features of an LLP include:
Separate legal entity: An LLP is legally distinct from its members, meaning it can enter contracts, own property, and sue or be sued in its name.
Limited liability: Members’ personal finances are protected, and their liability is limited to the amount they invest.
Flexible structure: LLPs have fewer administrative requirements compared to limited companies, making them ideal for professionals like lawyers, accountants, and consultants.
In short, an LLP offers the flexibility of a partnership with the protection of limited liability.
What are limited liability partnership members?
The members of an LLP are the individuals or entities that form the partnership and are responsible for running its operations. There are two key types of LLP members:
Designated members: These members take on specific administrative duties, such as filing annual returns and accounts with Companies House. Every LLP must have at least two designated members.
Ordinary members: These members contribute to the business’s operations and share in its profits but do not hold additional administrative responsibilities.
Members of an LLP can be individuals or corporate bodies (corporate member). Their roles, responsibilities, and profit-sharing arrangements are typically outlined in an LLP agreement - a legal document that sets out how the partnership will operate.
What are the advantages of an LLP?
An LLP offers numerous benefits for businesses, particularly professional partnerships. Here are some of the key advantages of a limited liability partnership:
Limited liability protection: Members’ personal assets are protected from the business’s debts. If the LLP faces financial difficulties, members are only liable for what they have invested.
Legal identity: An LLP is a separate legal entity, which means it can own property, enter contracts, and sue or be sued in its own name.
Flexibility in management: Unlike a limited company, an LLP allows for a more flexible management structure. Members can agree on how the business will be run and how profits will be shared.
Tax transparency: LLPs are not subject to corporation tax. Instead, members pay income tax on their share of profits, similar to a traditional partnership. This can be beneficial for tax planning.
Perpetual succession: An LLP continues to exist even if members leave or die, ensuring stability for the business.
Credibility and professionalism: Operating as an LLP adds credibility to a business, which can attract clients, investors, and lenders.
Attractive to professional firms: LLPs are particularly popular among law firms, accountants, architects, and consultancies due to their flexibility and liability protection.
What are the disadvantages of an LLP?
While LLPs offer many benefits, there are also some drawbacks to consider:
Public disclosure: LLPs must file annual accounts and a confirmation statement with Companies House. This information, including member details and financial records, is publicly accessible.
No corporate tax benefits: LLP members are taxed as individuals rather than benefiting from lower corporation tax rates. This can result in higher tax liabilities for some members.
Minimum member requirement: An LLP must have at least two designated members. If the partnership drops to one member, it risks being dissolved.
Reduced investor appeal: Unlike limited companies, LLPs cannot issue shares, which can make it harder to raise investment or funding.
Complex profit-sharing arrangements: While flexibility is an advantage, it can also be a disadvantage if there are disputes over profit allocation among members.
Self-assessment tax burden: LLP members must register file self-assessment tax returns and pay tax on their share of profits, which can be administratively time-consuming.
Not suitable for all businesses: LLPs are best suited for professional services. Other businesses may find limited companies or sole proprietorships more appropriate.
What is an example of an LLP?
Many professional firms in the UK operate as LLPs. A common example is a law firm. Here’s how it works in practice:
Example: A group of solicitors decides to set up a law firm. Instead of forming a traditional partnership, they register the firm as an LLP.
Structure: Each solicitor becomes a member of the LLP, contributing capital and sharing in the profits. An LLP agreement outlines their roles, responsibilities, who needs to agree decisions and profit distribution.
Benefits: If the law firm faces financial difficulties, the solicitors’ personal assets remain protected, as their liability is limited. Additionally, the LLP structure offers flexibility in managing the business.
What is the difference between a limited company and an LLP?
The main differences between an LLP and a limited company are:
Feature | Limited company | LLP |
|---|---|---|
Legal identity | Separate legal entity | Separate legal entity |
Liability | Limited to shares or guarantees | Limited to members’ contributions |
Taxation | Pays corporation tax | Members pay income tax on profits |
Management structure | Directors and shareholders | Flexible, governed by LLP agreement |
Filing | Accounts, annual returns, and statements | Accounts and confirmation statements |
Investment | Can issue shares to raise capital | Cannot issue shares |
💡Editor’s insight: “I’m often asked what is the best option for my venture an LLP or a limited company. Both structures provide limited liability. It all depends on your goals. LLPs are often preferred by professional partnerships like accountants, solicitors and consultants for their flexibility, while limited companies suit businesses looking to attract investors.”
How can I set up an LLP?
Setting up a limited liability partnership in the UK is a straightforward process. Follow these step or head to our complete guide to LLP registration.
Choose a name: Your LLP name must be unique, not offensive, and end with “LLP” or “Limited Liability Partnership.”
Appoint members: Decide who will be the designated members (at least two are required) and ordinary members.
Prepare an LLP agreement: Draft an LLP agreement outlining how the business will be run, including profit sharing, roles, and responsibilities.
Register with Companies House: You can register your LLP online or by post. You’ll need to provide an LLP name, a registered office address and details of members (name, address, etc.). You’ll also need a memorandum and articles of association.
Pay the registration fee: The current fee for registering an LLP is £50 online or £71 by post.
Obtain a Unique Taxpayer Reference (UTR): HMRC will send you a UTR, and you’ll need to register for self-assessment to pay taxes.
Open a business bank account: Set up a separate business account to manage the LLP’s finances.
Start trading: Once registered, your LLP can start operating under the agreed terms.
FAQs
What is a limited liability partnership in simple terms?
An LLP is a business structure that combines the flexibility of a partnership with the liability protection of a limited company. Members share profits but are not liable for the business’s debts.
What are the benefits of an LLP?
Benefits include limited liability protection, flexible management, tax transparency, and a professional business image.
Do LLPs pay corporation tax?
No, LLPs are not subject to corporation tax. Instead, members pay income tax on their share of profits through self-assessment.
Final thoughts
A limited liability partnership (LLP) is a practical and flexible business structure, particularly for professional firms and partnerships. It offers the benefits of limited liability, tax transparency, and a simple management framework.
However, it’s essential to weigh the advantages against the drawbacks, such as public disclosure and limited funding options. If you’re considering setting up an LLP, consulting a small business solicitor or accountant can ensure you’re making the best decision for your business.
References
Set up and run a limited liability partnership from Gov.uk
Set up a private limited company from Gov.uk
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.