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What is a Limited Liability Partnership?

    A limited liability partnership (llp), like a limited company, is an incorporated business structure that offers its owners limited liability. This means that it is a separate legal entity and is therefore responsible for the debt it incurs. 

    When the business incurs debts, the owners only have to pay a limited amount of debt through their own assets. This financially protects the owners of the LLP. The reduced financial responsibility is advantageous for the owners as they can take the necessary risks for the business to thrive while knowing that their personal assets are guarded.

    The Difference between an LLP and an Ltd

    Often people get confused between an LLP and a limited company (Ltd). This is understandable as they both are limited companies. However, what “limited” means, is different for both these company types, as you’ll find out below. Understanding the differences between these two business entities will help you come closer to a decision on which entity will be right for your business.

    • LLPs are only for profit organisations unlike private limited companies (Ltds) which can be limited by guarantee (non-profit).
    • An LLP must have at least two partners/members who are legally responsible for the company. In contrast, an Ltd must have at least one director (manager) and one shareholder (owner) – these can be the same people.
    • LLPs have no shares, shareholders or directors.
    • LLPs don’t have to pay corporation tax like Ltds. All partners pay tax on their own self assessment as a self-employed person.
    • The limit of each member’s liability in an LLP is determined between the members in the partnership agreement. In contrast, an Ltd’s liabilities are determined by the value, class and number of their shares.
    • An LLP has a far more flexible structure compared to an Ltd. An Ltd has its internal structure and management guidelines outlined by the articles of association and shareholders agreement.
    • As there are no shares, you can’t get capital off selling ownership of the company to non-LLP members. This is unlike an Ltd which can sell its shares. When it becomes a public company, it can then sell its shares on the stock exchange.
    • The person with significant control (PSC) must record their details on the company PSC register. It is compulsory to keep these up to date in both LLPs and Ltds.

    When you should think about setting up an LLP

    Although you now know the differences between an LLP and an Ltd, there is some standard advice that further helps the decision process. However, the decision of which entity your business is going to use is fundamentally down to you.

    • One of the main points to think about is the flexibility of the structure and the multiple ownership element.
    • The joint ownership section of this business entity makes having an LLP extremely useful for professions that have multiple high level jobs within the business: dentistries, law firms and accounting firms, for example.
    • Your business is currently a traditional partnership and you are thinking about growing the business and protecting your personal assets from paying off the business’ debt.
    • When changing from a traditional partnership to an LLP, your company will often get higher value contracts from larger corporations.
    • If your current business is susceptible to liability claims.

    When you should think about setting up an Ltd

    Similarly, before setting up an Ltd there are certain elements that predispose your current enterprise to becoming an Ltd over an LLP. Again, these elements are not set in stone and setting up another type of business entity may still be more beneficial.

    • One of the main perks of an Ltd is that you can start this company completely independently.
    • Another major advantage is that you can raise capital investment.
    • Furthermore, you can set up your limited company before trading or starting any business activity at all.
    • You can set up an inactive company.
    • You can employ a high number of people.
    • When limiting your company by guarantee, you can set up a non-profit organisation.

    How to register a Limited Liability Partnership

    LLPs are registered online, usually with the help of a company formation agent. This takes around three hours without any documents, personal meetings or signatures. Once the web based application is filled out it is posted to Companies House. Once your application has been approved, your new LLP can start trading. 

    Information you will need to provide:

    • Your unique business name
    • The country you’ll be formally licensing your business(England, Northern Ireland, Scotland, Wales)
    • An authorised business address in the country you’re licensing in – this address will be on the public record.

    It is often very beneficial to write down a partnership contract. This contract lays out the rights and obligations of each member. Although this document isn’t legally necessary, it is practically necessary. As there are no employee shares or contracts in LLPs, this document becomes the simplest way to outline the terms of the partnership. As the document isn’t necessary, there is no need to disclose its contents publicly. 

    Did you find this blog helpful? If so check out our other blogs. Our Guide to UK Business Types will give you a brief overview of every business type in the UK. This should help you further hone down which business entity is right for you.

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