A limited liability partnership (LLP) is a type of legal structure that is suitable for two or more professionals who would otherwise use the traditional (or ‘ordinary’) business partnership model. Incorporated at Companies House under the Limited Liability Partnerships Act 2000, an LLP is a distinct entity that is legally and financially separate from its owners (aka ‘members’ or ‘partners’).
In this blog, we discuss why some businesses may prefer to set up a limited liability partnership instead of a traditional partnership or limited company.
Many people find the concept of limited liability partnerships confusing. Why would you set up an LLP rather than a traditional partnership or limited company? What’s the difference? What does an LLP offer that you can’t get from an ordinary business partnership or a limited company ?
Essentially, it comes down to tax treatment, the financial liability of members, and organisational flexibility.
Traditional partnership:
Limited liability partnership:
As you can see, an LLP is basically a business partnership that is incorporated with limited liability. It combines the organisational flexibility and tax treatment of the traditional partnership model with the legal separation and financial protection of a limited company.
A limited liability partnership is the go-to business structure for two or more individuals running a professional services firm, including:
Before the introduction of the LLP model in 2001, these types of firms generally operated as traditional partnerships. However, unlimited liability stood in the way of growth and was debilitating for many businesses – particularly those working with high-value contacts or within high-risk industries where litigation was possible or likely.
Increasing pressure and intense lobbying resulted in the creation of the LLP , which was specifically designed to meet the needs of large professional firms that required a partnership structure with the security of limited liability.
This LLP structure also appeals to professional services firms because it allows them to:
However, almost any type of commercial business of any size can set up a limited liability partnership on the condition that it appoints at least two members and intends to make a profit.
In particular, the LLP model is increasingly used for certain property investment activities, retail and wholesale trading, and owner-managed businesses that require this combination of organisational flexibility and limited liability protection.
A limited liability partnership is a body corporate with a legal personality separate from its members. However, for tax purposes, LLPs are not regarded as separate and distinct legal entities. They are tax transparent, just like traditional partnerships, and they are not liable to Corporation Tax.
This means that an LLP’s tax burden is placed on its members. As a result, each member pays personal tax on their share of the LLP’s profits and gains.
Most LLP members are self-employed for tax purposes, so they are required to register for Self Assessment . They are responsible for filing individual tax returns with HMRC and paying Income Tax and National Insurance contributions on their annual earnings.
This tax treatment is beneficial for many types of professionals working in a partnership structure, particularly when the majority of profits are distributed to members as they’re generated.
However, if a significant percentage of profits is going to be reinvested or retained in the business, a limited liability partnership may not be the most tax-efficient structure, unless a corporate member is appointed to absorb this surplus income at the lower rate of Corporation Tax.