A limited liability partnership (LLP) is a kind of legal structure that’s suitable for 2 or more professionals who would otherwise use the normal (or ‘bizarre’) business partnership model. Incorporated at Firms House under the Limited Liability Partnerships Act 2000, an LLP is a definite entity that’s legally and financially separate from its owners (aka ‘members’ or ‘partners’).
On this blog, we discuss why some businesses may prefer to establish a limited liability partnership as an alternative of a conventional partnership or limited company.
LLPs – the perfect of each worlds for certain professions
Many individuals find the concept of limited liability partnerships confusing. Why would you arrange an LLP somewhat than a conventional partnership or limited company? What’s the difference? What does an LLP offer you can’t get from an bizarre business partnership or a limited company?
Essentially, it comes all the way down to tax treatment, the financial liability of members, and organisational flexibility.
Traditional partnership:
- an unincorporated business structure
- members have unlimited liability – they’re equally liable for all debts and liabilities of the business
- greater flexibility as a consequence of limited rules on internal governance and profit distribution
- tax transparency – tax on business profits is paid by members, somewhat than by the partnership itself
Limited company:
- an incorporated business structure that exists as a separate legal entity
- members enjoy limited liability protection for the corporate’s debts – their personal liability is capped at a specific amount
- strict rules on internal structure and profit distribution
- the business pays Corporation Tax on profits, and directors and shareholders pay personal tax on their salaries and dividends
Limited liability partnership:
- an incorporated business structure that exists as a separate legal entity
- members enjoy limited liability protection for the LLP’s debts
- greater flexibility as a consequence of limited rules on internal governance and profit distribution
- tax transparency – tax on business profits is paid by members, somewhat than by the LLP itself
As you’ll be able to see, an LLP is largely a business partnership that’s incorporated with limited liability. It combines the organisational flexibility and tax treatment of the normal partnership model with the legal separation and financial protection of a limited company.
What kinds of businesses would arrange a limited liability partnership?
A limited liability partnership is the go-to business structure for 2 or more individuals running an expert services firm, including:
- solicitors
- accountants
- financial advisors
- auditors
- engineers
- surveyors
- architects
- graphic designers
- consultants
Before the introduction of the LLP model in 2001, a lot of these firms generally operated as traditional partnerships. Nevertheless, unlimited liability stood in the way in which of growth and was debilitating for a lot of businesses – particularly those working with high-value contacts or inside high-risk industries where litigation was possible or likely.
Increasing pressure and intense lobbying resulted in the creation of the LLP, which was specifically designed to satisfy the needs of enormous skilled firms that required a partnership structure with the safety of limited liability.
This LLP structure also appeals to skilled services firms since it allows them to:
- divide business profits between each member based on contribution and performance targets
- pay Income Tax rates on business profits
- pay tax on profits only twice a yr
- avoid the necessity to operate PAYE and contribute 13.8% employer’s National Insurance (excluding salaried members and any employees of the LLP)
- appoint and take away members with relative ease, without the added administration, costs, and tax liability of issuing or transferring shares (as would the case in the event that they operated as a limited company)
- select how the LLP is governed and make alterations in response to changes in membership
- change individual member’s level of involvement or profit allocation without undue formalities or significant tax issues
- adjust members’ remuneration to reflect fluctuating levels of contribution, responsibility, or profits
Nevertheless, almost any kind of business business of any size can arrange a limited liability partnership on the condition that it appoints a minimum of two members and intends to make a profit.
Specifically, the LLP model is increasingly used for certain property investment activities, retail and wholesale trading, and owner-managed businesses that require this mixture of organisational flexibility and limited liability protection.
How are LLPs taxed?
A limited liability partnership is a body corporate with a legal personality separate from its members. Nevertheless, for tax purposes, LLPs should not considered separate and distinct legal entities. They’re tax transparent, similar to traditional partnerships, and so they should not liable to Corporation Tax.
Because of this an LLP’s tax burden is placed on its members. In consequence, each member pays personal tax on their share of the LLP’s profits and gains.
Most LLP members are self-employed for tax purposes, in order that they are required to register for Self Assessment. They’re liable for filing individual tax returns with HMRC and paying Income Tax and National Insurance contributions on their annual earnings.
This tax treatment is useful for a lot of kinds of professionals working in a partnership structure, particularly when nearly all of profits are distributed to members as they’re generated.
Nevertheless, if a major percentage of profits goes to be reinvested or retained within the business, a limited liability partnership will not be probably the most tax-efficient structure, unless a company member is appointed to soak up this surplus income on the lower rate of Corporation Tax.
