LLPs and Limited companies are common types of business structures in the UK. Both are used to limit liability while offering flexibility, but there are also notable differences between the two.
In this guide, we set out the key considerations of the LLP vs Ltd company structures to help determine which you should adopt for your organisation.
What is an LLP?
A Limited Liability Partnership is a business structure that was first introduced in 2001 by the LLP Act 2000. It takes the normal partnership structure and provides added financial protection to each ‘member’ in the form of limited liability, effectively making it a hybrid of the partnership and limited company structures.
In practice, LLPs are commonly used for professional service businesses that would generally operate as a partnership, such as solicitors, architects or dental practices.
What is a limited company?
A limited company is a separate legal identity to its owners and directors. The finances of the limited company are also separate and as with the LLP, it offers a limited liability to the owners and directors.
A company may be limited by shares or by guarantee.
The limited company structure is typically used for trading businesses.
Which is best – LLP v Ltd?
There are many commercial and legal differences between the LLP and Ltd structures, which will need to be considered when determining which is best for your organisation.
Similarities between an LLP and a limited company
Whether you choose an LLP or a limited company, both types of structure must be registered with Companies House and both require a registered office address.
Annual Reporting obligations
At the time of writing, both types of company are required to file annual accounts.
For limited companies, this is for the purpose of paying corporation tax and capital gains tax on all taxable profit.
LLPs don’t file company tax returns, and they don’t pay corporation tax. If their taxable turnover reaches £85,000 however, they will be required to register for VAT.
It is a legal requirement that all businesses keep a record of their ‘beneficial ownership’. This means the people who control and own the company. This record must be reported to Companies House.
This requirement applies equally to LLPs and limited companies.
Differences between an LLP and a limited company
Owners and Members
It is possible for a limited company to be owned, registered and managed by one person, who would be both director and shareholder (or guarantor).
To set up an LLP, there must be at least two members, unless a dormant limited company is set up to act as the second LLP member.
Although there is limited liability for both LLPs and limited companies, there are differences.
With a limited company, the liability of the guarantors or shareholders is limited to the amount of their guarantee or the amount paid or unpaid on their shares.
With an LLP, the liability is limited to the amount each member agrees to pay should the business close down or run into financial difficulty.
Loans and capital investment
A limited company can be funded through loans and capital investment from outside investors generally in return for shares in the business.
An LLP can only receive extra funding through loans as it has no shares to offer to investors.
Tax and Capital Gains
LLP members pay income tax, national insurance and capital gains tax on their personal income from the business. The LLP is not liable to pay tax in its own right. Each member must register as self-employed through the HMRC and file a yearly tax return.
A limited company, as a legal entity separate to the owners and directors, will pay corporation tax and capital gains tax on all company profits.
A limited company offers you the chance to leave profits in the business, rather than withdrawing them to distribute amongst shareholders. The related tax can then be deferred to a future tax year. This option is not possible with an LLP, where all profit is taxed in the financial year that it is generated.
When it comes to capital gains, LLP members are taxable for this personally in the same way that they are taxed personally for the income they receive from the business.
For a limited company, capital gains are taxed via the company’s corporation tax.
It is possible for a shareholder of a limited company to also receive a salary or bonus from the company, say in the scenario where the shareholder is a company director, but this will attract personal income tax and national insurance payments.
Of the two business structures, only a limited company can be operated on a non-profit basis, although it must be limited by guarantee.
Internal structure and allocation of profits
Unless there is an LLP agreement in place, it is easier to alter the internal structure of an LLP than of a limited company which must adhere to the rules stated in its articles of association.
Similarly, it is easier to make changes to the distribution of profits in an LLP.
A limited company must adhere to the voting rights and powers of its shareholders, whereas there are no shareholders in an LLP to take into consideration.
Shareholders and allocation of profits
The shareholders of a limited company are paid a share of company profits by way of dividends. The rules for these payments, according to the class of share held and the corresponding rights, are fixed by the rules set out in the company articles of association.
An LLP has no shares or shareholders. Any profit made is shared equally, or as agreed, between the members, and is subject to tax on a personal and immediate basis for each member.
LLP vs Ltd – how to decide which is the best fit?
How you choose the best business structure for you – LLP or limited company – will depend on the nature of your business and how it may develop in the future. Deciding factors you may wish to take into account include:
Non-Profit or For Profit?
If you wish to set up on a ‘non-profit’ basis, then limited company (limited by guarantee) is your choice.
If you wish to run your business on a ‘for profit’ basis, then you have a choice of LLP or a limited company that is limited by shares.
Do you want to sell shares to raise capital?
If you intend to raise capital by the sale of shares, then a limited company that is limited by shares is your only option.
An LLP does not have shares to sell.
How much profit do you intend to make with your business?
In the case of a limited company, the directors, who may be the only shareholders in the company, are classified as employees of the company. Their salary is subject to income tax, national insurance and employers’ national insurance contributions. Any company profits are then taxed on the basis of corporation tax.
With an LLP, the members are seen to be self-employed and therefore pay income tax and national insurance. An LLP does not pay employers national insurance contributions. Corporation tax does not come into play as any company profits have already been taxed via the members’ income tax.
The benefit will be decided by how much profit the company makes and how much the owners pay in income tax.
Number of employees
If your number of employees will remain small, perhaps just the two or three members who set up the business, and those employees make similar contributions to the business and are paid similar salaries, the LLP structure is likely to be more tax efficient.
If you expect your number of employees to be large, or at least larger than the number of owners, then a limited company that is limited by shares will be the more tax efficient option.
Selling the business
Will you want to sell the business at some point in the future?
Either kind of business, LLP or limited company, can be sold but it is generally easier to sell a limited company because it has its own identity separate to that of the owners.
Are you going into business with others?
If one of the main driving forces of going into business is the wish to own a business jointly, i.e. in partnership, rather than simply taking advantage of the limited liability, then entering into an LLP may well be the way to go.
Why legal advice is important
The decision as to whether to trade as an LLP or a limited company is not straightforward and depends entirely on your individual circumstances and motivations in starting a business.
Making the right choice can provide tax savings and future-proof your business.
Specialist legal advice will steer you through the decision-making process to find the right structure for you and your business, now and in the future.
LLP v Ltd FAQs
What is the difference between LLP vs Ltd?
LLPs and Ltd companies have many differences in areas such as tax, investment rules, organisational flexibility and management, and confidentiality.
What are the benefits of an LLP over a limited company?
Under an LLP, there is more flexibility than a limited liability structure in relation to areas such as profit sharing and allowing new members into the partnership.
What are the disadvantages of an LLP?
The disadvantages of an LLP include the requirement to have at least two members, that income is taxed as personal income, that profit cannot be retained in the business in the same way as with companies limited by shares, and the general disclosure rules.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.