What are the advantages and disadvantages of a limited liability partnership

A Limited liability partnership (LLP) is a type of business structure in the UK.

Limited liability partnerships can offer significant advantages over trading purely as a sole trader or as a general partnership. An LLP offers some advantages of both limited company and a partnership. These advantages include limited liability protection, tax benefits, and increased credibility.

In this blog, we’ll explain what a limited liability partnership is, how it differs from a limited company and the advantages and disadvantages an LLP can offer.

What is a limited liability partnership (LLP)?

Limited Liability Partnerships or LLP’s as they are known as were introduced in 2000 by the Partnerships Act 2000 to provide partnerships with limited personal liability that was previously only available to companies.

An LLP is a form of business structure in the UK that has become popular among business owners and many businesses such as accountants, lawyers, architects and consultancy firms etc.

As a business model, a Limited liability partnership provides the benefits of a private limited company (such as limited liability and separate legal entity) along with flexibility offered by a traditional partnership firm.

The owners of an LLP, known as LLP designated members, have limited liability for its debts. However, for tax purposes the individual LLP members are taxed like sole traders/partners on their share of profits.

How is a limited liability partnership different from a limited company?

LLPs are considered easier to set up and are comparatively easier to run with regard to reporting requirements as there is a lower compliance burden.

As with limited companies, an LLP is registered with Companies House. However, there are differences between companies and LLPs in terms of public records as limited companies must file things like articles of association at Companies House and hold and minute shareholder meetings.

Limited companies are regulated by the Companies Act in a more rigid way than partnerships governed by the Limited Liability Partnership Act. For example, limited companies face regulations that do not exist for partnerships, when awarding or selling shares or options to employees and directors.

The exit route for a partner from an LLP may also be easier than that of a director of a limited company for tax purposes. In a partnership the transfer of an interest to another partner will not trigger a disposal for capital gains tax purposes unless the partner makes a gain on his capital account. The transfer of shares in a company at a profit will trigger a disposal for capital gains tax purposes on which capital gains tax is payable.

Understanding Limited Liability Partnerships: Advantages & disadvantages

Using an LLP structure can have several advantages over other business structures in the UK, but there are also some disadvantages you need to be aware of before setting up an LLP. Below we will look in more detail in the advantages and disadvantages of an LLP structure.

What are the advantages of limited liability partnerships?

Limited liability protection

One of the most significant advantages of an LLP is the limited liability it offers. An LLP is considered a separate legal entity to its member’s or partner’s. Limited liability protects the member’s/partner’s personal assets from the liabilities of the business (in the same way that a limited company does). LLPs are a separate legal entity to the members. This means that should the business incur business debts or face legal action; an LLP member will not be personally liable for the debt or for the outcome of the legal action.

Members of an LLP are generally only liable to the extent of their capital contributions to the partnership. However, it is worth noting that this limited liability protection can be eroded if the LLP becomes insolvent. With regard to an insolvent LLP, members may become liable for tax debts or repayment of drawings, so advice should be sought.

Tax advantages of an LLP

LLPs offer tax transparency. LLPs are generally taxed as a partnership, meaning they do not pay tax on profits such as corporation tax which a limited company has to pay. Instead, the profits are distributed to the partners, who report them on their personal self-assessment tax returns and will pay income tax on them. This can provide significant tax benefits to businesses trading as LLPs, such as on National Insurance contributions (NICs), benefits in kind, and taxation of profits.

LLP partners can receive a combination of both profit share and salary. Partners can choose to take a lower salary in exchange for a higher profit share or vice versa. If the partners of the LLP are in a lower tax bracket than a business would be for corporation tax, then these tax benefits can be maximised.

Credibility and professional reputation

Forming an LLP can also provide added credibility and professionalism, particularly over someone operating as a sole trader. This can be particularly valuable for businesses looking to maybe take on government contracts, establish a strong brand or attract new clients and potential investors.

LLP names are protected

As with all UK company formations, once incorporated at Companies House, an LLPs company name is legally protected. No other limited liability partnership or company can be registered with the same name or one that is similar. General partnerships and sole traders do not get the same level of protection for their business names.

Public disclosure & confidentiality

Whilst a limited company’s information e.g. Articles of Association are publicly available at Companies House, an LLP’s version of this i.e. a Members’ Agreement is remains private and is not publicly disclosed. LLPs are however, still required to file annual accounts and maintain statutory registers as per a limited company.

Easy to set up

Forming a LLP can be a straightforward and inexpensive process, especially when using the services of an online company formation agent such as dns accountants.

To register an LLP, you complete an application form for Companies House. This form requires:

• A unique LLP name
• A registered office address
• Details of all LLP members (minimum of two required)
• Details of people with significant control (PSCs).

Flexibility

Unlike limited companies, which must have a board of directors and official officers, LLPs can be managed by the members/partners themselves. There are also no upper restrictions on the number or type of partners that can be involved in a LLP (an LLP requires at least two designated members at all times), making it a flexible option for businesses with multiple owners or partners.

An LLP also provides flexibility in profit sharing arrangements. A company is restricted by the shareholding arrangements and moving shares or equity between shareholders is likely to give rise to a tax charge under the share related remuneration rules. LLP members, however, can vary profit sharing arrangements from year to year with complete flexibility and can also increase the equity interest of new members without any tax charges.

Capital requirement

There is no minimum capital requirement in an LLP, so to become a partner in an LLP can be via a small amount of capital or no capital. However, it is worth noting that members of an LLP only enjoy limited liability up to the amount of their contributions to the LLP.

What are the disadvantages of an LLP?

LLP reporting requirements & public record disclosure

LLPs have more complexity and more company reporting obligations to fulfil than general partnerships but less than a limited company. These reporting obligations include:

• preparing and filing LLP accounts to Companies House
• maintaining a registered office address
• maintaining statutory LLP registers, including a PSC register
• Registering the LLP for VAT if applicable
• filing an annual confirmation statement
• informing HMRC and Companies House of changes to the LLP for example members details, registered office address etc.

Profit allocation & retention

Profit cannot be retained in the same way as a company limited by shares. This means all earned profit is effectively distributed with no flexibility to hold over profit to a future tax year.

Tax implications

Things like R&D tax relief are only available to limited companies, so broadly most LLPs are excluded from claiming tax reliefs such as R&D tax credits. Therefore, if your business is likely to invest in R&D now or in the future an LLP business structure may not be right for you.

Raising capital

Raising additional capital for a LLP may be harder this is because LLPs only offer limited liability protection, meaning some investors may not invest.

Longevity of an LLP

LLPs must have a minimum of two designated members at all times. If an LLP partner dies or leaves, then the LLP will need to be dissolved and reformed with new partners/members.

Summary

Setting up as a LLP is a good idea if you’re planning to go into business with other people. LLPs are often an attractive option for many businesses due to the increasing corporation and dividend tax rates and the other tax benefits that LLPs may offer.

The structure you choose for your business venture largely depends on your circumstances. However, professional advice should be sought when setting up an LLP to ensure it is the right option for your company today and in the future.

For more help and advice on LLPs and other types of business structure contact dns on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.