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.
Are Limited Liability Partnerships different to general partnerships?
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.
A general partnership is simply an agreement between two or more partners to work in business together. A partnership might outwardly appear to be a company, but legally and from a tax point of view, it is simply a collection of people or businesses who are cooperating.
Like a general partnership
Unlike a general partnership
An LLP is a collection of partners who cooperate to carry out business together.
An LLP is a separate legal entity to its owners so like a company, there is a limit to the extent that partners are personally liable for any debts.
Are LLPs common?
Some of the best-known names in business are LLPs. The giveaway is that they have to append their name with ‘LLP’, for example, “DLA Piper International LLP”
Accountancy and law firms will often operate as partnerships, but the structure can be found across all sectors. Many other professional businesses, such as doctors, solicitors, architects, and insolvency practitioners, work as LLPs, too.
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.
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.
Can a limited company be a partner in an LLP?
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. For instance:
You may want a corporate member in an LLP if it is part of a group of partnerships. Many international firms, such as accountants and lawyers, have partnerships in each country that they work in, and then a main holding partnership that is a member of each. This echoes the practice of limited companies setting up local subsidiaries.
An investor or lender may only be willing to fund a partnership if they have some say in the running of the business. To facilitate this, the lending or investing organisation will be appointed as a member with voting rights, and someone from that organisation will be the LLP’s point of contact.
Someone working as a consultant or professional director may simply prefer to work as a member of the partnership via their own professional company.
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.
What having a corporate member means for voting rights and management in a partnership
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.
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The benefits of operating an LLP
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.
Protecting your name at Companies House
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.
Ownership of an LLP
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.
The downsides of LLPs
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 that they’re particularly straightforward).
An LLP, because it must register at Companies House, has a bit more to do, including:
Submit an SA800 return, which is a Self Assessment tax return for the partnership itself.
Similar to a limited company, LLPs must also prepare accounts each year, and lodge these with Companies House to show the partnership’s income. This may disclose the individual income of the members themselves.
Any partnership must have at least 2 designated members at all times, so if one member leaves, the partnership is dissolved. 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:
Registering the business for Self Assessment with HMRC
Preparing, signing, and submitting annual accounts to Companies House
Sending a Confirmation Statement to Companies House
Telling Companies House about any changes (for example, to the registered name or address of the partnership or its members)
Acting for the LLP if it’s wound up and dissolved
It’s important to remember that these are statutory duties, and designated members can be prosecuted if they fail to carry them out correctly.
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Taxation and Limited Liability Partnerships
One of the biggest differences between a Limited Liability Partnership and a limited company is the way in which they deal with tax.
An LLP is ‘transparent’ for tax purposes, in that the tax authorities ‘look through’ the partnership, to the partners.
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.
An example of tax in an LLP
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.
The partner who is a sole trader will include the details of the partnership on their Self Assessment tax return. Their share of the profits will be included in their tax calculation.
The partner which is a limited company will include the details of the partnership in its Company Tax Return, and pay Corporation Tax on its share of the profits. The individual shareholders will only pay tax on any salaries or dividends they go on to take from the limited company.
Tax in a limited company
Unlike an LLP which doesn’t pay tax as an organisation, a limited company does. The directors must submit a Company Tax Return so HMRC can work out how much Corporation Tax the business owes. The directors and shareholders are then taxed separately on any money they take out the business – but only if they do actually take any income (such as a salary or dividends).
LLPs vs limited companies
The differences between limited companies and Limited Liability Partnerships at a glance.
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.
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.
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.
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.
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.
Can we say that an LLP is the best idea for you? Well truthfully, although this is a boring answer, no, we can’t. Every organisation is different and whilst two businesses may look the same from the outside, they may actually operate very differently.
The best option is to talk all the issues through as they relate specifically to your business plans, with someone who understands all the issues and can give you qualified advice.