What is a limited liability partnership?
There are many ways that a business can be set up legally, each with their own benefits.
A limited liability partnership, or LLP, is one of these legal business structures; somewhere between a limited company and a ‘traditional’ partnership, this article goes into more detail on how an LLP might be founded, and where it would be appropriate to do so.
This article provides general information, to be used as an introduction to the subject. For specific details on LLPs, contact one of our experts to find out more.
What is a limited liability partnership (LLP)?
Despite the name, limited liability partnerships in the UK are legislated as corporate bodies, not as partnerships.
However, in some ways an LLP is similar to a traditional partnership. They share similar structures in terms of internal management and tax liability, and with regards to profit distribution.
Unlike a traditional partnership, an LLP to a certain extent separates legal responsibility from the members, or partners, who are responsible for what they invest or guarantee, but don’t risk loss of personal assets.
Whereas a company needs to have both directors and shareholders, an LLP only needs to have members or partners. There is no upper limit on how many partners there can be, but there is a lower limit of two.
The partners can be either individuals or companies, meaning that it is possible to set up an LLP with one person and one other company, or with two companies. The partnership must be registered at Companies House, and is only available for profit-orientated businesses, not charities. The limited liability company must also be registered to an address.
Who would an LLP be beneficial for?
Another difference between limited liability partnerships and companies is that whereas companies are taxed as corporations, with an LLP each member is technically self employed, and completes a self assessment each year.
As a result of this, LLPs tend to be more suited to smaller businesses with a steady membership, who all both give to and take from the business in similar amounts.
LLPs may be desirable business structures for people who have deep experience in their industry, a significant client base between them, and wish to pool resources such as PR and physical locations. Common examples of businesses which choose to register as LLPs are law practices and accountancy firms.
Benefits to LLPs
A significant benefit to setting up a limited liability partnership is that, as the name suggests, personal assets are protected through limited liability.
Of course this doesn’t mean partners are free to carry out unlawful practices, but there are reasonable and beneficial protections afforded from insolvency proceedings and the like. Essentially, assets from the business are liable to loss, but not personal assets.
Another benefit is that members can be companies rather than individuals; this means that risk of personal liability can be even further removed.
LLPs also have no obligations as employers, provided the only people who work for them are member partners. This means that the business is not required to pay Class 1 Employers’ National Insurance Contributions on payments to its members, as they remain self-employed.
Downsides to LLPs
One of the downsides to forming an LLP is the added complexity of each partner having to file their own tax returns. This creates additional accounting and filing costs, and can be more complex than being an employee at a company.
Another drawback is that the finances of the partners are available for the public to access, which may not be desirable in some business areas. The level of transparency required of LLPs is high; they’re required to keep certain details available for public access, both at the registered address and online.
Another potential downside is that of tax rates; corporation tax is charged at 20%, whereas upper band self assessed income tax can be as high as 45%. This provides less leeway for member payouts at perhaps more convenient times, as profits need to be paid to partners annually.
External investment may also become an issue. As a result of being unable to sell shares or have shareholders, those who wish to invest in an LLP have to become members, a level of commitment which they may not be willing to make. Any income from such investments would also be directly subject to income tax, as the investor would be a self-employed member of the business.
How to set up an LLP
Registering as a limited liability partnership is a relatively simple process, however before setting up as an LLP, certain requirements must be met. These are listed below:
- Must always have two member partners, two of whom must take legal responsibility for the entire LLP.
- Has to be a profit-making business.
- There must be no directors, shares, or shareholders.
- Must have a physical address.
- Each member must accept liability to pay tax through Self-Assessment, as partners receive untaxed profits.
- Partnership agreement or something similar which outlines each member’s liability, to be agreed between all members.
- Must provide a new business name not in use or too similar to any in existence.
- A choice of the country in which you wish your partnership to be licenced (England, Wales or Scotland.)
Once these requirements are met, with the help of a company formations agent the limited liability partnership can be registered online with Companies House. After the application has been approved, which can happen in just a few hours, it can start trading.
Insolvency
If an LLP is facing insolvency, there can be some flexibility with moving forward. An insolvency practitioner can look at both individual partner and overall partnership debts, and seek to create a recovery plan which best suits all members.
Given the nature of common LLP businesses, such as those in the legal profession and the accountancy niche, it can be imperative that partners are free to continue protecting their reputation, continuing to provide services to their clients.
The insolvency options available will depend on the partnership agreement, and other variables.
If you have any questions or need further expert advice, don’t hesitate to contact our team today on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk