If you’re starting a business then choosing the right 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.
When you’re looking at going into business with someone else (or multiple other people) and you want to limit your own personal liability, then two options you might consider are setting up a limited company, or registering a Limited Liability Partnership. We explain how they’re different, who might find each structure most useful, and how to get started.
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.
Other similarities and differences for companies and LLPs
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.
Public information for companies and LLPs
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.
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Personal liability for limited companies and LLPs
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.
How many people do I need to set up a company or an LLP?
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.
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
In a limited company it’s not unusual for one person to own, manage and register the 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.
Should I start a limited company or an LLP?
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. It’s also worth noting that LLPs can’t be used for non-profit purposes, so you should set up a limited company if you need to operate a non-profit organisation.
Reasons to set up a Limited Liability Partnership
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.
Reasons to choose a limited company
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.