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Limited Liability Partnerships (LLPs) are a way of setting up a formal business partnership whilst limiting the liability of the partners, rather like a limited company does for the people who own it. We’ll look at how LLPs work, things to consider, and what all this means for tax.
Yes, Limited Liability Partnerships, or LLPs, are different to general partnerships. Introduced in April 2001 by the Limited Liability Partnerships Act 2000, LLPs are often described as a sort of hybrid between a partnership and a limited company.
Although both LLPs and general partnerships are essentially a group of partners who work together to carry out business, the key difference between them boils down to liability.
The partners in a general partnership aren’t legally separated from the partnership, so their personal money and assets might be at risk if the business can’t pay its debts.
In that respect, a Limited Liability Partnership is more like a limited company. The business is legally separate to the partners involved in it, so there is a limit to the extent that partners are personally liable for any debts if things go wrong (which is often seen as an advantage when forming a limited company too).
Similar to setting up a general partnership, an LLP must register for Self Assessment. Unlike general partnerships though, a Limited Liability Partnership must also register with Companies House.
In both cases, you’ll also need to register each member as a partner in the partnership. It’s normally a good idea to have a partnership agreement in place to put the arrangement on a more formal footing, and set out rights, responsibilities, and how to split any profits.
The partners in a partnership might be individual people (‘natural persons’ in Companies House speak), other organisations, or a combination. For instance, one partner could be a partnership or limited company, whilst another partner is a single person.
Whilst the vast majority of members in Limited Liability Partnerships are people, partners might sometimes be a corporate member, such as a limited company or even another LLP. The obvious question is, why have a corporate member in an LLP? Well, there are several reasons:
An LLP may appoint a corporate member for any reason it sees fit, and will deal with voting rights and apportioning profit by having varying levels of membership.
In practice the company is the member. To deal with things like membership votes, making decisions, and the partnership’s management, the company will appoint a person to represent its interests as a proxy.
This means that on a day-to-day basis, members won’t see any real difference between a corporate member and an ordinary member. Only when it comes to company law or taxation does it become important.
There are actually several advantages to operating a business as a Limited Liability Partnership.
The main benefit of an LLP is in the name – limited liability. Although the members will share in the profits and management of the partnership, the extent to which they are personally liable for any debts or obligations that it takes on is limited by their initial investment.
Just like a limited company, an LLP is an entity in its own right. It can sign contracts and incur debts just like a natural person. So, if things go bad, the debts stay with the LLP rather than the partners. This is in contrast to a general partnership where each partner is usually jointly liable for any debt.
An LLP must register at Companies House, and this grants a level of protection over the partnership name. Another group can’t come along and register themselves with the same or similar name in an attempt to pass themselves off as the business.
An LLP can be owned by a group of limited companies, and doesn’t need to have a person as a member. This can be particularly useful if a group of companies want to work together on a specific project, for example. A limited company, on the other hand, must have at least one person as a director.
The LLP can still have a formal constitution that sets out the rules of the partnership, and even create different levels of partners who then share in the profits in different ways. In a limited company this would be done by creating different classes of shareholder.
As with most things, operating as an LLP is not all roses, and there are downsides when compared to either a company or general partnership.
All businesses have reporting requirements which they must comply with. Sole traders are usually considered to have the least complicated reporting requirements, only needing to submit Self Assessment tax returns – though yes, anyone who has ever filled one in probably doesn’t think they’re particularly straightforward.
An LLP, because it must register at Companies House, has a bit more to do, including:
Any partnership must have at least 2 designated members at all times, and the partnership will be dissolved if there are fewer than this. One of the partners must be ‘nominated’, and take responsibility for the partnership’s reporting requirements.
That doesn’t mean that the other partners are off the hook! The nominated partner basically takes care of the partnership’s admin; it’s up to all of the partners to make sure it’s done (correctly, and on time). Duties and responsibilities in a partnership include:
It’s important to remember that these are statutory duties, and designated members can be prosecuted if they fail to carry them out correctly.
One of the biggest differences between a Limited Liability Partnership and a limited company is the way in which they deal with tax.
This means that the LLP itself is ignored for tax purposes, even though it must submit a Self Assessment tax return. Instead, taxation is based on the members’ share of the profits.
Imagine an LLP with two partners; one is a sole trader, and the other is a limited company. The LLP submits accounts to Companies House, and a Self Assessment tax return to declare its income, profits, and losses, but it doesn’t actually pay any tax itself.
Instead, these profits are divided up according to what each partner is entitled to (which, in turn, is based on the agreement between the partners). The partners are then taxed on their share of the profits, whether or not they are actually distributed.
If you’d like have an initial chat about our accounting services for LLPs, then call one of the team on 020 3355 4047, or get an instant online quote.
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