Limited Liability Partnerships: Everything You Need To KnowMay 25, 2022
If you’re looking for information on limited liability partnerships (LLPs), you’re in the right place.
Our team of highly qualified Chartered Accountants and Qualified Insolvency Practitioners are true business experts.
When it comes to setting up and running businesses and, naturally, steering them through troubled times, we are well placed to advise on the pros and cons of LLPs.
In this article, we explain what is a limited liability partnership, discuss its advantages and disadvantages, and consider its role with regards to insolvency.
Read on for everything you need to know.
General partnerships versus LLPs: What is a limited liability partnership?
A general partnership is an agreement between two or more parties to work together for profit.
A simple enough concept, such partnerships can be relatively informal and are not even necessarily underpinned by a contract.
A limited liability partnership - commonly referred to as an LLP - is a more formal arrangement and is covered by Government legislation in the Limited Liability Partnerships Regulations 2001.
Being a more formal arrangement, an LLP denotes certain protections to the partners when it comes to liability.
Should the business become insolvent, partners are only liable to the extent agreed in the LLP agreement.
Similarly, should legal action be taken against the company for any reason, the action will be against the legal entity as opposed to individual partners.
In addition, when a client engages a business that is set up as an LLP, they engage a specific partner as opposed to the company as a whole.
Note: an LLP shouldn’t be confused with a limited partnership.
A limited partnership refers to a partnership between two or more partners, but where a general partner runs the business and the limited partner(s) do not engage in day-to-day management.
In an LLP however, all partners can engage in the running of the business.
What are the advantages of a limited liability partnership?
There are a range of reasons why LLPs are a popular option for individuals collaborating to set up a business.
An LLP is a bespoke agreement. This allows partners to dictate the level of their involvement in the business in a variety of ways.
For example, responsibilities for management can be laid out during the formation of the business.
Similarly, plans for profit sharing will be formalised.
There may be tax advantages to forming an LLP due to the flexibility of the partnership.
Members can enter the agreement as companies as well as individuals, which may be of benefit depending on their situation and the nature of the agreement.
Crucially, as the name suggests, there are benefits when it comes to liability.
An LLP offers protections when it comes to partners' personal assets.
How to set up an LLP
Setting up an LLP requires registration at Companies House.
This can be done via electronic registration using approved software, by post, or with the assistance of a firm specialising in company formations.
The Government provides a guide to setting up an LLP which covers the elements involved.
Key requirements include:
- The choosing of a name. The name must not be the same as or considered too similar to an already registered company’s name.
- Having a registered address for the LLP for all written communication. While you can use your home address for this, it will be a matter of public record.
- Details of how the LLP has been formed, including member responsibilities, how profits will be shared, and how individuals can leave the partnership.
Among the members, there must be a designated member(s) who will take responsibility for engaging with Companies House and HMRC (in order to register the LLP for self-assessment - more on tax regulations below).
Note: should any changes be made to the LLP, Companies House needs to be informed.
Limited liability partnerships and tax
In a limited company, corporation tax is paid on annual profits.
However, in an LLP, the members are regarded as self-employed by HMRC and will be required to complete a self-assessment.
Income tax will need to be paid on their share of the LLP’s annual profits.
The business will be taxed as a whole entity too. This is also done via self-assessment.
If you are the designated member responsible for registering the LLP for self-assessment, head to the HMRC website.
Disadvantages of limited liability partnerships
A limited liability partnership may not be the most appropriate choice for all persons going into business together.
Some disadvantages of limited liability partnerships include the fact that once registered at Companies House, the partnership’s finances will be a matter of public record - which not all partners may be comfortable with.
Setting up an LLP can be a costly process as can be administering it, given that additional accounting and filing requirements are more labour intensive.
Additionally, unlike a company limited by shares, all profits earned are distributed among the partners with no option to hold over profit to a subsequent tax year.
Limited liability partnerships: Everything You Need To Know
Limited liability partnerships can be an effective option for business collaboration, ensuring potential liability is reduced and allowing for a transparent professional framework.
It may not be the right option for everyone and we would always recommend seeking advice from a Chartered Accountant.
If you are considering entering into a limited liability partnership and would like to learn more about the potential liability you might face, or perhaps you are part of an LLP facing financial difficulties, our team is on-hand for a no-obligation chat to discuss your options.