In England and Wales, businesses can operate under various legal structures, including ordinary partnerships and Limited Liability Partnerships (LLPs).
Despite both being referred to informally as ‘partnerships’ and both being forms of partnership, there are several important differences between ‘ordinary’ partnerships and LLPs.
1. Liability
Ordinary Partnerships: In an ordinary partnership, each partner is jointly and severally liable for the debts and obligations of the business. This means that if the partnership cannot fulfil its obligations, creditors can pursue any partner for the entire debt. Consequently, each partner’s personal assets could be at risk if the partnership is unable to meet its financial obligations.
Limited Liability Partnerships: An LLP offers limited liability protection to its partners, meaning that each partner is only liable for the debts of the partnership up to the amount they have invested in the business. Personal assets are generally protected in the event of the partnership’s failure, providing a key advantage over ordinary partnerships for many businesses.
2. Legal Entity
Ordinary Partnerships: An ordinary partnership is not a separate legal entity, meaning that it is not distinct from its partners. This implies that partners are personally responsible for any legal actions, debts, or obligations incurred by the partnership.
Limited Liability Partnerships: An LLP is a separate legal entity that can enter into contracts, own property, and sue or be sued in its own name. This distinction provides additional protection for partners, as they are not personally liable for the legal actions, debts, or obligations of the partnership (beyond their investment).
3. Taxation
Ordinary Partnerships: Profits generated by an ordinary partnership are divided among the partners, who are then taxed individually on their share of the profits. Each partner is responsible for paying income tax and National Insurance Contributions (NICs) on their earnings.
Limited Liability Partnerships: LLPs are considered ‘transparent’ for tax purposes, meaning that each partner is taxed on their share of the partnership’s profits. Similar to ordinary partnerships, partners are responsible for paying income tax and NICs on their earnings. However, LLPs must also file annual accounts with Companies House, which may require additional administrative work compared to ordinary partnerships.
4. Registration and Formation
Ordinary Partnerships: Setting up an ordinary partnership is relatively straightforward, with no requirement to register the partnership with Companies House. However, it is advisable to have a written partnership agreement to outline the rights and responsibilities of each partner.
Limited Liability Partnerships: LLPs must be registered with Companies House, and the process involves providing details of the partnership’s proposed name, registered office address, and designated members. Additionally, an LLP must have at least two designated members who take on extra responsibilities, such as filing annual accounts and notifying Companies House of changes in the partnership structure.
Understanding the differences between ordinary partnerships and Limited Liability Partnerships is crucial for making informed decisions about your business structure. While LLPs offer limited liability protection and a separate legal entity status, they also come with additional registration and compliance requirements. On the other hand, ordinary partnerships are simpler to set up but do not offer the same degree of protection for partners. Consulting with a qualified solicitor can help you determine which partnership structure is best suited to your business needs and goals.
Contact us today for advice on the most appropriate legal structure for your business.