Combining aspects of an ordinary (general) partnership structure and a limited company, a limited liability partnership (LLP) is an incorporated business partnership that exists as a separate ‘legal person’. It is responsible for its own debts, providing limited liability protection to members (partners), yet it retains the organisational flexibility and tax position of an ordinary partnership.
You need at least two partners (members) to form an LLP, and there is generally no upper limited to the number of members allowed. At least two of the partners must be ‘designated members’, who assume responsibility for the statutory administrative requirements of the partnership. LLPs do not have directors.
The key benefits of an LLP are limited liability protection for members, who are legally and financially separate from the business; flexible management structure and profit distribution options; greater professional image and credibility; and the protection of the partnership’s registered name.
Whilst both are incorporated at Companies House, there are noteworthy differences between an LLP and a limited company:
To find out more about the differences between the two structures, please read Limited company or LLP?
Most LLPs are formed by professional services providers, like accountants, lawyers, architects, and dentists, who tend to work in groups and pool their resources. The LLP structure enables partners to enjoy the flexible structure and tax status of the ordinary partnership model, whilst at the same time providing ‘limited liability’ to protect their personal finances and assets.
LLPs are tax transparent, like ordinary partnerships, so they do not pay Corporation Tax. Each LLP member is self-employed for tax purposes. They file personal (Self Assessment) tax returns each year and pay Income Tax and National Insurance on their share of the profits received from the LLP.
If an LLP is VAT registered, the LLP is responsible for filing VAT Returns with HMRC and paying its VAT bills.
An LLP is a body corporate (an incorporated business), which means that it is a separate legal entity and provides limited liability to its partners (members). Owing to the flexible organisational structure of an LLP, members can assign rights, responsibilities, and profit distribution however they see fit, provided all members are in agreement.
These provisions are normally set out in an LLP agreement and must be in accordance with the LLP Act 2000 and all other relevant legislation.
It is possible to appoint another company (a ‘corporate body’) as a partner (member) of an LLP. In such instances, the company would be liable to Corporation Tax on any profit received from the LLP, which can then be withdrawn from the company as dividends.
The legal requirements of an LLP include:
It is the legal responsibility of designated members to ensure that the LLP meets all of these requirements.
LLPs are subject to many of the same administrative rules as limited companies. They must file annual confirmation statements and annual accounts with Companies House, register the LLP for Self Assessment, and file Partnership Tax Returns with HMRC. Some LLPs may need to register for VAT.
Each LLP member must also register for Self Assessment and file a personal tax return with HMRC each year.
An LLP agreement is an optional legal contract between members of an LLP, which sets out the rights, duties, and responsibilities of each member; their relationship between each other; their investment, liability, and profit entitlement; and the rules for running the partnership.
To form an LLP in the UK, you need to complete an application to incorporate at Companies House. The easiest way to do this is online through Cheap Formation, using our exclusive LLP package, which costs just £29.99 (+VAT) and includes an optional LLP agreement.
Simply spend a few minutes entering the required information on the application form, then one of our specialist team members will carry out a pre-submission review (which reduces the risk of rejection) before it is sent to Companies House. Once approved (usually within 3-6 business hours), you will receive copies of your LLP documents and you can begin trading at any point.
An LLP must have at least two members (partners) on incorporation and throughout its existence, but you can set up an LLP with one person if you appoint a dormant company as the second member. Some sole traders may find this preferable to forming a limited company, because they can retain their Self Assessment tax status whilst benefiting from the limited liability protection of an LLP.
In accordance with the Limited Liability Partnerships Act 2000, an LLP must be incorporated “with a view to profit”, thus it is not possible to set up an LLP as a charity or non-profit organisation. The ‘self employed’ tax status of LLP members is simply not compatible with charitable or not-for-profit ventures, which is why it is generally recommended to set up a limited by guarantee company for such purposes.
The main difference between an LLP and a ordinary partnership is that an LLP is a distinct entity with a legal personality that is separate from its partners (members). This provides limited liability protection to members. An ordinary partnership, however, is not legally distinct from its partners, so all partners are equally responsible for all debts and obligations of the business.