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If you’re starting a business then choosing the right structure, such as a Limited Liability Partnership or a limited company, can be confusing. There are pros and cons to each, and what works for one business might not be a good fit for another.
We explain how they’re different, who might find each structure most useful, and how to get started.
One of the key differences between limited companies and LLPs is the treatment of tax. A limited company is completely separate from the people in the business, so for tax this means:
An LLP as an entity isn’t taxable, but the members are. So, no Company Tax Return, and no Corporation Tax for an LLP. Instead, the untaxed profits are distributed to its members. They then pay tax on the value of their portion, by completing a Self Assessment tax return.
Both limited companies and LLP are registered at Companies House, and both must file annual accounts, but the way that they raise funds and pay members from the business is different.
The company can sell shares in exchange for capital investment – basically selling a chunk of the business to raise money. In an LLP there are no shares, shareholders, or directors, so they don’t have this option.
Whilst a limited company’s information (known as Articles of Association) are publicly available at Companies House, an LLP’s version of this (a Members’ Agreement) is private.
Private limited companies are ‘limited’ because they ‘limit’ the amount of personal responsibility that members of the business have for any debts. In a private limited company, the personal responsibility (or ‘liability’) of the owners is restricted to the value of their investments or guarantees to the company.
An LLP is a bit like a combination of a normal partnership in terms of tax liability. But, like a limited company, each partner has reduced financial liability. This means that partners aren’t responsible for each others conduct (or negligence).
Members agree an amount that they guarantee to pay should the business run into difficulty, and record it in the partnership agreement outlining their rights and responsibilities.
LLPs must have at least two partners as designated members, but there’s no maximum on how many you can have. You could even set up a dormant limited company, and use that as the second member in your LLP.
As a member of an LLP, there are some duties you must perform.
It’s not unusual for one person to own, manage and register a limited company by themselves, acting as both director and shareholder. Our guide to incorporating a limited company explains the process in more detail, or watch our short video below.
The structure you choose largely depends on your circumstances. LLPs are useful for companies that usually operate as a partnership, such as accountancy firms or solicitors.
LLPs also can’t be used for non-profit purposes, so you should set up a limited company if you need to operate a non-profit company.
Setting up as a partnership is a good idea if you’re planning to go into business with other people. In an LLP you’ll still be able to protect your private assets if the business does fail.
An LLP is also more flexible if you know you want to add or remove people in the business, whereas the structure of a limited company is more rigid. For some people though, this is a good thing, as it means everyone in the business must agree to any changes.
If you plan to raise money for the business (or to sell some or all of the business in the future) then operating a limited company will allow you to do this. You’ll also need to set-up a company if you’ll be operating a non-profit organisation.
Would you like help choosing your business structure and setting it up? Call us on 020 3355 4047, request a callback, or use the Live Chat button to talk to one of the team!
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Despite your excellent information baove I am still confused re the best way forward, as to setting up as a sole trader (does that protect my business) as a Ltd or LLP company? I want to put three strands of business under one name so please would you come back to me with the best option as i do not see myself necessarily making money out of this just a living!