There are so many questions to ask when setting up a business that you might forget to ask yourself how you plan to structure it until the last minute. So, what’s the difference between LLP vs Ltd companies, and how should you choose which one is best for you? Let’s find out.
Limited Liability Partnerships were introduced by the UK government in 2001. The Limited Liability Partnership, or LLP, offers many of the same features as a limited company, such as limited liability. However, the two are different in a number of important ways. These are best understood once you know what an LLP is.
What is an LLP?
An LLP is designed to be a halfway point between a traditional partnership and a private limited company. For those who like the idea, it’s an opportunity to have the benefits of a partnership while also limiting your exposure. However, LLPs are not for everyone.
An LLP is likely to be a partnership between two individuals. For example, imagine two solicitors want to go into partnership with one another. They don’t plan to recruit large numbers of employees and will keep their practice small-scale.
LLP vs Ltd
On the face of it, LLPs share many of the same characteristics of limited companies. They both have to be incorporated at Companies House and they both involve higher reporting and filing requirements than the option of being a sole trader or a partnership, but in reality they are very different.
A limited company will be limited by shares or guarantee. It will pay corporation tax on all profits, have a registered UK address and bank account and can sell shares for profit and give investors a dividend. You can set it up as an individual naming yourself as a director and major shareholder.
An LLP, on the other hand, has to be set up with at least two people. While the liability of shareholders in an Ltd company is limited by the value of their shares, the limit of a partner’s liability in an LLP will be agreed between them. It cannot sell shares or receive capital from them and the structure of the partnership is flexible and can be changed at any time.
Why have an LLP?
Having an LLP, then, is not for everyone. It doesn’t work if you want to start out on your own, and may not be the best option if you plan to grow your company or raise capital through the value of your shares. In short, it’s a good idea if you’re a partnership looking to scale up a little or if you’re involved in high-risk activities which could open you up to liabilities.
Disadvantages of an LLP in the UK
The main disadvantage of an LLP is that it can be less tax efficient if you plan to employ lots of people. The income is still personal income and will be taxed as such. Tax can, therefore, be higher than you’d pay as an Ltd company and profits cannot be retained in the same way.
Converting LLP to a limited company
Now you understand the differences between LLP vs Ltd, you might decide you want to convert an existing LLP into a limited company. To do this, all the partners will have to agree to transfer the assets of the partnership into a limited company structure. You’ll have to arrange directors and shareholders in the same way as a limited company and register the change at Companies House. This is something you can do with help from a formation agent.