What Is a Limited Liability Partnership?

Limited liability partnerships (LLPs) are a type of legal structure for businesses of all sizes, which sit somewhere between a traditional partnership and a limited company. In an LLP, there are at least two business partners and each partner has limited liability, meaning they are not responsible for another partner’s misconduct, debts or malpractice. Ultimately, each partner is responsible for their own negligence.

Key Benefits of a Limited Liability Partnership

• Asset protection for each member: If an LLP were to be sued, the personal assets of each partner would be protected.
• Flexible management: Partners in an LLP determine management structure themselves, with each partner choosing how much management responsibility they would like to have.
• Legal entity: Once formed, an LLP is considered a legal entity separate from its members.

Conditions of a Limited Liability Partnership

• An LLP must have at least two partners at all times. However, it is possible to form an LLP on your own by setting up a dormant company as the second member.
• At least two partners must be ‘designated’ members and assume additional legal responsibilities on behalf of the entire LLP and its members.
• There are no shares, shareholders or directors in an LLP.
• You must have a registered office address in the country of incorporation.
• You must maintain a PSC register.
• Annual accounts and a confirmation statement must be delivered to Companies House each year.
• It has to be set up as a profit-making business, LLPs can’t be used for non-profit enterprises or charities.
• Each LLP member is taxed through self-assessment as a self-employed individual. This is because LLPs do not pay corporation tax.
• LLPs do not have shares to sell so they cannot receive capital investment in exchange for a portion of ownership of the business from non-LLP members.

What is the Difference Between A Traditional Partnership and an LLP?

The key difference is the level of financial responsibility of the partners. Traditional partnerships place the full burden of business debts upon the partners. Conversely, LLPs place reduced financial liability upon the partners, which makes this a more appealing option for many small businesses.

The introduction of LLPs has enabled certain professions (such as solicitors, accountancy firms and dental practices) that normally operate as a traditional partnership to benefit from the reduced financial risk of a limited company as well as flexibility in terms of internal management structure, taxation, profit distribution and the rights and duties of partners.

Should You Form A Limited Company or an LLP?

This choice is dependent on a variety of factors such as the kind of business you have, the number of people setting it up, your preferred internal management structure, tax liabilities and profit distribution.

When is Choosing an LLP The Better Option?

An LLP is a great alternate structure for a business with a small and consistent number of members who each make comparable contributions and draw similar profits. Additionally, if the activities of the partnership involve high-risk services, or there is a likelihood that claims could be brought against the business, an LLP would be a particularly beneficial business structure.

When is Choosing a Limited Company The Better Option?

If your business is non-profit, you wish to sell shares in your business to raise capital and/or you plan to employ lots of people with a payroll that will likely be higher than the owners’ salaries, some form of limited company would be a better choice in terms of tax-efficiency as opposed to an LLP.

Five Steps For Setting Up a Limited Liability Partnership (LLP)

1. Choose a name.
2. Have a registered address – this will be publicly available.
3. Have at least two designated members.
4. Create an LLP agreement stating how the LLP will be run.
5. Register the LLP with Companies House.

Further Advice

If you would like any advice, information or guidance on any types of limited company and their formation, do not hesitate to ask. Call us on 0800 0198 698 today or find out more about creating an LLP with Paramount.