Limited Liability Partnerships are a business format with some benefits and disadvantages compared to partnerships and small companies limited by shares.
An LLP operates as a partnership and is more similar to a partnership than it is to a limited company. There will be a partnership agreement and the partners will have current accounts with the business. Partners of an LLP share profits and take drawings just as with any other partnership. Broadly an LLP prepares accounts like a limited company but is taxed like a partnership.
LLP compared to a partnership
A key benefit of LLP over a partnership is that the “limited liability” of the LLP protects the partners’ assets. If the LLP cannot pay its debts or liabilities it could be wound up and usually the partners’ non-business assets will be safe. In a traditional partnership (non-LLP) the personal assets of the partners are at risk in the business. If something goes wrong in a traditional partnership and the business cannot pay its debts or liabilities, then the partners have to pay in personally, even if this means selling their home.
A disadvantage of an LLP compared to a partnership is that an LLP has to prepare and publish accounts in the same way that a company has to. This means that full financial statements have to be prepared following statutory rules. Disclosures and notes have to be included in the accounts of an LLP that are not required in the simple accounts of a traditional partnership. Accounts (often abbreviated accounts) are filed with Companies House for all LLPs whereas partnerships do not publicise any figures.
LLP compared to a company
The main reason for choosing a limited liability partnership over a limited company is usually that an LLP has flexible profit shares, whereas a company must distribute its profits in proportion to the shareholdings of the members. This is of great benefit where the amount of profits to be distributed to each partner is dependent on events throughout the year, or may vary for any reason year on year.
A further advantage is that at high profit levels (more than £300,000) there can be an overall tax saving with an LLP although this does depend on exact circumstances.
The disadvantage of an LLP compared to a limited company is that for most businesses the tax and national insurance of an LLP is more than that of a company. The LLP pays full personal tax on all profits regardless of whether the profits have been paid to the members, whereas the company only pays corporation tax on profits not paid out to members. Also an LLP pays national insurance on all profits whereas a company can be arranged to pay low or no national insurance if dividends can be paid out.
If you are setting up a business and not sure whether LLP or limited company is right for you, please contact us. Also, there are ways of transferring from one form of entity to another, please contact us if you would like to discuss the best format for your existing business.