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.
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.
Tax in a limited company versus in an LLP
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:
- A limited company pays tax in its own right, by submitting a Company Tax Return and paying Corporation Tax on any taxable profits
- The directors pay tax separately on the income they earn from the business. Their income could be from a salary which the company pays them. If the directors are also shareholders, then they might also receive a share of the company’s profits in the form of dividends.
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 if they’re an individual.
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.
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.
The differences between limited companies and Limited Liability Partnerships at a glance
| LLP | Limited Company | Details | |
| Articles of association or members agreement | They can be kept private, and only disclosed to members. | Kept in the public domain, and are accessible at Companies House. | An LLP can offer additional privacy in that respect. |
| Inward investment | Partnerships don’t have any shares to sell in order to raise investment. 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. | This is not to say that you can’t get investment as an LLP, just that it can be more complicated. |
| Sale and exit | There aren’t any shares, but partners can ‘sell’ their partnership back to the LLP. | It’s easier to sell through a share sale, and often seen as more attractive. | Most buyers will better understand a limited company sale by shares, and prefer it. |
| Taxation | 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 pay tax on what they take out of the company. | The best option depends on circumstances. |
| 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. | Ownership of the LLP can be complicated if shares need to be unequal. |
| Management | Need to have partnership votes on important issues but in general works the same as a limited company. | Needs to have a shareholders general meeting for important issues but execs run the company. | Management between the two forms is largely the same on a day-to-day basis. |
| Motivation | Partners can be more motivated because they own a share in the organisation. | May need to allot shares to senior executives to motivate behaviours. | Most partners have a meaningful share in their organisation and so tend to feel much more a part of the business. |
| Admin and reporting | Must submit accounts and confirmation statement annually to Companies House and SA800 for HMRC. | Annual accounts and confirmation statement needed for Companies House and CT600 for HMRC. | Admin burden is largely the same. |
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.
Would you like help choosing your business structure and setting it up? Call us on 020 3355 4047, or get an instant online quote.
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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!