If you are considering starting a business in the UK, you must consider what the most suitable legal business structure would be for your brand.
This choice not only lays the foundation for the growth of the business but also determines the way the business operates, how the business is taxed and the level of liability.
Some business structures are better than others depending on the requirements of the business owners.
Previously, we have examined the characteristics of being a sole trader and partnership agreements, including their advantages and disadvantages.
Today’s blog will focus on limited liability partnerships (LLPs).
Limited liability partnerships
LLPs combine elements of traditional partnerships with the benefits of limited liability.
They are a flexible and attractive option for entrepreneurs and business professionals.
This legal structure has no cap on the number of partners. However, at least two must serve as ‘designated members’ responsible for submitting the annual accounts.
The partners in an LLP have limited liability, meaning their personal assets are protected from the business’s debts and liabilities, similar to shareholders in a limited company.
This contrasts with traditional partnerships, where partners have unlimited liability for the business’s obligations.
Similar to a partnership, each member must register with HM Revenue & Customs as self-employed. LLPs must also register with Companies House and a members’ agreement should be in place, specifying what share of the profit each member should receive.
Advantages of LLPs
- Limited liability – One of the most attractive features of an LLP is the limited liability it provides to its partners. This means a partner’s personal assets are protected from the debts and obligations of the business.
- Flexibility in management and profit distribution – LLPs offer partners the freedom to decide on their management structure and profit distribution. This flexibility allows partners to tailor the business according to their needs and preferences, which can lead to increased productivity, efficiency and collaboration.
- Tax transparency – LLPs are considered tax-transparent entities, meaning the business itself is not subject to Corporation Tax. Instead, each partner is responsible for paying Income Tax and National Insurance contributions on their share of the profits, potentially avoiding double taxation.
- Separate legal entity – An LLP is a separate legal entity, distinct from its partners. This allows the LLP to enter into contracts, own property and sue or be sued in its own name.
Disadvantages of LLPs
- Administrative requirements – There are more administrative requirements compared to traditional partnerships, such as the need to file annual accounts and confirmation statements with Companies House. This can result in additional costs and time-consuming tasks for partners.
- Public disclosure – LLPs must make certain information available to the public, including annual accounts and details of the designated members. Resulting in reduced privacy for partners.
- Personal tax rates – Depending on the individual partners’ tax circumstances, they may end up paying higher personal tax rates on their share of the profits than they would if the business were structured as a limited company subject to Corporation Tax.
- Complexity – Setting up and managing an LLP can be more complex, compared to a traditional partnership or sole trader, particularly in the absence of a well-drafted LLP agreement. Disputes may arise between partners if roles, responsibilities and profit-sharing arrangements are not clearly defined in writing.
LLPs offer numerous benefits including limited liability, management flexibility and tax transparency. However, it’s essential to weigh these advantages against the increased administrative requirements, public disclosure obligations and potential complexities associated with LLPs.
Need any advice navigating your finances as a limited liability partnership? Get in touch today.