What’s the difference between a limited liability partnership (LLP) and a limited company?
Setting up and running a business involves making key choices, and one of the most fundamental is whether to be an LLP (which stands for limited liability partnership) or a limited company. Choosing the best structure depends on a number of critical factors including the ambitions for the business, raising capital and tax efficiency. Let’s start with the meaning of LLP and the definition of a private limited company.
What is a private limited company?
The majority of limited companies are set up to make a profit. The ownership of the company is through shares, usually owned by directors who manage the business, or by other shareholders who are not involved in day-to-day business operations.
· The company must be registered at Companies House and file annual accounts.
· The company can be owned by a single shareholder
· The liability of a limited company is no more than the value of the shares
· The company is a separate legal entity from its owners
· Company finances are separate from personal ones
· The company can keep profits after paying corporation tax
· Directors can take income in the form of salary and/or dividends (if also a shareholder), with the latter being subject to sufficient available reserves in the company to be able to do so
· A Director who also own shares in the company, pays income tax on salary and dividends although the rates of tax are lower on dividends at each income threshold; basic, higher rate and additional rate compared to PAYE income. A salary is also subject to National insurance deductions and is a tax deductible expense for Corporation tax. Dividends are not subject to National Insurance and are paid out of available reserves and so do not provide corporation tax relief to the limited company.
Unlike companies whose liabilities are limited by shares, not-for-profit companies can also be set up with liabilities limited to a guaranteed amount.
What is a limited liability partnership (LLP)?
In a similar way to limited companies, LLPs can protect the assets of business owners by limiting their liability. For LLPs the liability is limited to the amount of investment the members (i.e. the partners) have made in the business. There are further similarities, but also important differences.
· LLPs must be registered at Companies House and file annual accounts.
· Partnerships can be set up by a minimum of two people, known as designated members
· Liability is limited to the sums each partner invests in the business plus any personal guarantees
· Partnerships are separate legal entities from their members
· The rules for joining or leaving the partnership are set out in the Partnership Agreement
· Partnerships do not have shares
· Members’ earnings from the partnership are declared through self-assessment and are subject to income tax and Class 2 and 4 National Insurance.
What are the advantages of an LLP over a limited company?
At Perrys, we provide a full range of accounting services for partnerships and limited companies with our ethos of exceptional as standard. To find out about the services we can provide for your business, contact us now for a free consultation.
Tax for LLPs and limited companies
The UK tax system is well known for its complexities and working out the relative tax positions for LLPs and limited companies is not a simple task. In essence, the comparison is between paying income tax through self-assessment as a designated member of an LLP, or paying a combination of corporation tax on company profits, and income tax on a remuneration of salary and dividends as a director and shareholder of a limited company.
The tax paid on income falls into 20%, 40% and 45% bands and partners in an LLP are taxed accordingly. Directors in a limited company are subject to the same income tax bands, while the company profits are currently taxed at 19%. The income tax on dividends is in bands at the rates of 7.5%, 32.5% and 38.1%. (All figures for 2021/22). Tax free allowances apply to both income tax and dividend tax.
The issue for directors is how their income is taken, and the use of allowances and tax bands for maximum tax efficiency. There is no simple answer to whether you pay more or less tax as a partner or director, which may affect your decision to set up in business as an LLP or limited company, or to convert your business from one to the other.
At Perrys, our tax experts will be able to give you the detailed information you need to make the right decision.
Are LLPs more flexible than limited companies?
One advantage of being an LLP is that members can make decisions about how the business is run and the distribution of profits, without needing formal board meetings and resolutions.
Partners can also leave or join the partnership without capital changing hands, creating greater fluidity for senior personnel. This fluidity is particularly suited to professional firms. 19 of the top 20 legal firms by revenue are LLPs, as are many other solicitors and legal practices. Over 60% of top accountancy practices and many surveying firms are also set up as partnerships.
The accounting requirements for professional firms are subject to specific rules such as those applied by the Solicitors Regulation Authority (SRA). At Perrys, we are proud to provide specialist accounting services for lawyers, accountants and other professionals.
How do you change ownership at limited companies and LLPs?
Limited company shares can be traded, thereby changing ownership of a proportion of the business. The ability to trade shares makes limited companies an attractive vehicle for investors and facilitates the raising of funds for the business.
Ownership of a proportion of a partnership can only happen as the result of becoming a member of the partnership. The rules of leaving or joining are set down in each LLP’s Partnership Agreement, the formal agreement set up by the original partners in the business. Becoming a partner is likely to be significantly more difficult than trading in the shares of a limited company.
What are the reporting requirements for LLPs and limited companies?
The requirements for filing annual accounts at Companies House applies to limited companies and LLPs. Companies House must also be provided with details of key personnel (directors and members).
Tax reporting for members of partnerships is based on self-assessment returns. Limited companies file returns on corporation tax and dividend tax, and directors are also subject to income tax. VAT registered LLPs and limited companies must also provide VAT returns.
Can LLPs operate with more privacy than limited companies?
Accounts filed at Companies House are available for inspection, so the records for limited companies and LLPs are visible to potential business contacts and clients.
However, key documents about the nature of the business are treated differently. A limited company’s Articles of Association, as registered at Companies House, are available for public viewing. The Members’ Agreement, which sets out the core business and mode of operation of an LLP, is not.
Find out how Perrys makes a difference for our LLP and limited company clients
We provide professional accounting expertise for LLPs and limited companies. Our team includes experts in all aspects of financial management and planning for both types of business, and we are proud to help our clients run their businesses successfully.
If you would like to chat to us, drop us a line today to set up an initial, free consultation on a friendly, no-obligation basis.
We are always happy to hear from you.