Setting up a new business can be a very exciting time with the promise of new opportunities ahead. However, before you get started there are multiple options for company structures that should be carefully considered.
Two of the most common choices are Limited Liability Partnerships (LLP) and limited companies (LTD) - but what do these terms mean, and which should you choose? While there are some similar characteristics between them, these two structures differ in numerous fundamental respects.
In this article, we will look at the different types of business structure, explain what each is for and highlight some key considerations when making your choice.
What is an LLP?
A Limited Liability Partnership is perhaps best thought of as an intermediate option between a standard partnership and a private limited company.
In a traditional business partnership the partners would ordinarily be liable for the debts of the business, and the formation of a limited company has long been a standard way to protect the individuals from liability through the creation of a new legal entity.
In 2001, the LLP Act 2000 introduced Limited Liability Partnerships for the first time in order to address the needs of certain types of professionals who traditionally tend to form partnerships (such as doctors, solicitors, accountants, and so on).
An LLP allows business owners to retain the partnership model while at the same time limiting their exposure to liability - effectively a ‘best of both worlds’ option. In this respect, we might say that LLPs and limited companies are quite similar.
There are some other similarities between LLPs and limited companies. They must both be registered at Companies House and both have more involved requirements for reporting and filing than would be the case under a normal partnership.
How do LLPs and limited companies differ?
Despite some similarities, there are many ways in which the LLP setup differs from that of a limited company.
One such example to consider is confidentiality. Whereas a limited company will have Articles of Association available to the public at Companies House, a Limited Liability Partnership agreement will be completely private. However, some degree of confidentiality can be achieved for limited companies through the creation of a private Shareholder's Agreement that expands on the terms contained in the Articles.
Then there is the matter of taxation. Limited companies are considered discrete legal entities for tax purposes, and are expected to pay corporation tax on all profits (with directors and shareholders paying taxes on their own salaries and dividends). On the other hand, partners in an LLP are usually considered to be self-employed and liable to pay income tax on their profits.
The LLP structure is sometimes favoured for its relative tax simplicity, but there are different situations in which each type of business structure might be more tax efficient.
When it comes to funding the business and attracting investors, limited companies often have an easier time as investors can buy shares without needing to become a director. Investing in an LLP may necessitate becoming a member in the partnership, and this would mean that the investor’s share could not be sold in the same manner as a company share.
It is always worth bearing in mind that an existing LLP can be converted into a limited company in the future. In order for this to happen, the partners have to agree to transfer the assets of the partnership into a limited company and go through the steps that are required for the formation of any limited company (such as arranging directors and shareholders, and registering the new company at Companies House).
Setting up an LLP
A Limited Liability Partnership can be set up with two or more members, where each member can be either an individual or a 'corporate member' (in other words, a company).
The process of forming the LLP includes these steps:
- Selecting a name for your business. This must end in 'Limited Liability Partnership' or 'LLP' and not be too similar to any other business' name.
- Drawing up an LLP Agreement explaining how the business will be run.
- Registering at Companies House (you will need to give a registered address that will be publicly visible).
An LLP must have at least two 'designated members'. These members in the partnership will have more responsibilities than normal members (which will include matters such as completing the necessary tax registrations, taking care of the accounting, sending statements to Companies House, and more).
Designated members are also expected to let Companies House know about any changes (such as if there is a new registered address or a change to a member's details) and to act for the LLP in the event that it gets wound up and dissolved.
Failing to meet these legal requirements can result in prosecution, so it is important that each designated member in the LLP stays on top of their responsibilities. If in doubt, it is advisable to seek professional legal help.
Whether you decide to form an LLP or a limited company, there are pros and cons for each depending on the type of business you want to start and the kind of relationship that exists between you and your business partners.
Picking the right structure is a good way to get your new business off on the right foot from day one, and by carefully considering each option you can make sure that you pick the right model for your needs.