Starting a company is a stressful and confusing time for anyone, especially when it comes to choosing what type of company to set up as.
Two popular types are the Limited Company and the Limited Liability Partnership. They’ve got their pros and cons. While one may be a perfect fit for one company, it might not work for another so it will be down to your personal circumstances, business type and what you want from a registered company.
So what’s the difference? Here’s a rundown on the differences and reasons why people choose one over the other to help you make the right decision for you.
A limited company is a private company that is completely separate from its owners. This means that the owners are only responsible for business debts up to the value of their investments or guarantees to the company.
Private limited companies are limited by shares (for-profit) or by guarantee (non-profit). This means that the company is divided into shares and profits are distributed among shareholders depending on the value of their share.
Limited Liability Partnership
A LLP is a partnership where some or all of company’s partners have limited liabilities. It was introduced in 2001 and is useful for companies that usually operate as a partnership like accountancy firms or solicitors.
An LLP is similar to a normal partnership in terms of tax liability but provides a reduced financial liability for each partner. This means that each partner is not responsible for another’s misconduct or negligence.
LLPs can’t be used for non-profit purposes. If you need to set up a non-profit company, then you’ll have to set up a limited company.
A limited company can be owned, managed or registered by just one person. One person can act as a director and shareholder.
With a LLP, a minimum of two members are needed to set it up. However, to get around this you could set up a dormant limited company and use that as the second LLP member.
Both types of company have to file annual accounts (though this will change to quarterly soon). However, there are some key difference in tax liabilities.
Limited companies have to pay Corporation Tax and Capital Gains Tax on all taxable profit.
LLPs don’t have to file Company Tax Returns or pay Corporation Tax. However, a LLP will have to register for VAT if its taxable turnover reaches £85,000.
Rather than the LLP being taxed itself, untaxed profits are distributed to members and then they pay the tax themselves depending on the value of their share.
So each member will have to register as self-employed through HMRC’s Self-Assessment and file a tax return each year in order to pay income tax and Class 2 and 4 National Insurance Contributions.
Shareholders vs members
In a limited company, shareholders receive a share of company profits in the form of dividends. Limited companies can sell shares in exchange for capital investment.
In a LLP there are no shares, shareholders or directors. So LLPs can’t receive investment in exchange for part ownership of the company.
With LLP members, liability is limited to the amount each member guarantees to pay should the business run into financial difficulty. This is agreed between members in a partnership agreement which will outline rights and responsibilities.
LLPs have to have at least two partners as designated members but there’s no limit on how many.
Their duties include:
- Filing annual accounts and confirmation statements
- Registering the LLP for Self-Assessment and VAT if applicable
- Reporting any changes to HMRC and Companies House where necessary
- Maintaining accounts or appointing an accountant
- Representing the LLP in any legal matters
- Making sure the LLP is adhering to all forms of statutory compliance
Reasons to choose a LLP
Setting up as a partnership is a good idea if you’re planning to go into business with other people.
By entering into a LLP, members get to protect their private assets. If the business should fail, they are only going to lose money they’ve invested in the partnership if it’s down to their mistakes.
If you want flexibility in your internal business structure, then a LLP is more beneficial for you as you can change it whenever you want by adding or removing members. The structure of a limited company is more rigid.
You don’t have to pay Corporation Tax. However, all profits that the LLP makes are seen as income for the directors and will be subject to income tax.
Reasons to choose a limited company
If you plan to sell shares of your business in exchange for capital investment, then a limited company will be a better fit for you.
If you’re operating a non-profit company, then your decision is simple, you need to form a company limited by guarantee. You can’t have a non-profit LLP.
As the LLP is taxed on personal income, this needs to be submitted to Companies House for public record. Some people may prefer this information was not made public so may prefer a limited company.
Would you like help in choosing what type of company to set up? You can call us on 020 3355 4047 or leave a comment below and we’ll get back to you soon.