If you’re starting a business then choosing the right legal structure can be confusing. There are pros and cons to each, and what works for one business might not be a good fit for another.
If you’re looking at setting up a business which limits your own personal liability then you might consider either setting up a limited company or registering a Limited Liability Partnership. In this article we explain who might find each structure most useful, along with the differences in how they’re taxed, registered, and operated.
Personal liability for limited companies and LLPs
Private limited companies get this name because they ‘limit’ the amount of personal responsibility the owners and directors have for any business debts to the value of their investments in or guarantees to the company.
LLPs are similar because they also reduce each partner’s personal liability, so partners aren’t responsible for each other’s conduct (or negligence). The partners – also known as Members – will guarantee how much they must pay if the business runs into problems, and record it in the partnership agreement.
Tax in a limited company versus in an LLP
One of the key differences between limited companies and LLPs is the treatment of tax; limited companies pay tax as an entity, but LLPs don’t.
How a limited company is taxed
A limited company is completely separate from the people in the business, so for tax this means:
- The company pays tax as an entity in its own right by submitting a Company Tax Return and then paying Corporation Tax on any taxable profits
- The people who own and run the company are all completely separate to the business, so any income they earn from it will be taxed individually. For example, by paying Income Tax on their wages if they get a company salary, or Dividend Tax if they receive a share of the company’s profits because they’re a shareholder.
How LLPs are taxed
An LLP as an entity isn’t taxable, but the members are, so they’ll pay tax on their share of the LLP’s profits even if they’re not distributed and stay in the business.
Setting up the business
Both limited companies and LLPs need to register with Companies House, and both pay the same incorporation fees – but they do have different requirements for how many people are involved.
LLPs must have at least two partners, but there’s no maximum on how many you can have (and you could always set up a dormant limited company and use that as the second member in your LLP).
Private limited companies can be incorporated by a single person who is both the only director and only shareholder.
We have separate guides which go into more detail about registering each business type:
Public information and protecting privacy in companies and LLPs
Registering with Companies House means information about who owns and runs a company or LLP is available on the public register, along with the business’s annual accounts and confirmation statements.
LLPs are sometimes seen as being slightly more private than limited companies because they don’t need to share the partnership or member agreement with Companies House. The equivalent document in a limited company (known as its Articles of Association) must be placed on public record.
Roles, responsibilities, and admin
Many of the reporting requirements and obligations are similar between LLPs and limited companies. As a member or director you may need to:
- File annual accounts and confirmation statements
- Keep records about the business (known as bookkeeping) and any key changes
- Prepare and file the annual tax return (an SA800 Partnership Tax Return for an LLP, and a CT600 Company Tax Return for a company)
- Report any changes to HMRC and Companies House where necessary
- Make sure the business is compliant with any statutory requirements
Comparing companies and LLPs – at a glance
| LLP | Limited Company | |
| Ownership | You need at least two partners, who generally have equal shares. | Can be owned by one person who is both the only director and shareholder. |
| Management | Partners must vote on important issues but in general works the same as a limited company. | Shareholders might need to vote on important issues, but most day-to-day management is dealt with by the directors. |
| Liability | Limited to what the partners guarantee they will pay in if the partnership has issues. | Limited to what the owners invest in the business. |
| Privacy | Details such as the registered address, owners and key individuals, annual accounts, and confirmation statements are all available on public record.
An LLP’s partnership agreement can be kept private. |
Details such as the registered address, owners and key individuals, annual accounts, and confirmation statements are all available on public record.
A company’s articles of association must be published on Companies House. |
| Admin and reporting | Must submit accounts and confirmation statement annually to Companies House and an SA800 Partnership Tax Return to HMRC. | Annual accounts and confirmation statement needed for Companies House and a CT600 Company Tax Return for HMRC. |
| Tax | The business isn’t taxed, but the members are (whether or not the LLP distributes the funds). | The business pays tax on its profits, and members only pay tax on what they take out of the company. |
| Inward investment | Partnerships don’t have any shares to sell, so any investment coming in after forming the partnership might require changes to the partnership agreement. | Relatively simple. The company can sell or issue shares to raise money for the business. |
| Sale and exit | There aren’t any shares, but partners can ‘sell’ their rights back to the LLP. | It’s easier to sell through a share sale, and often seen as more attractive. |
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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!