Limited Liability Partnership (LLP) Advantages and Disadvantages

Limited liability protection explained.

Limited liability protection is a legal concept in company registration that separates the business from its founders in the eyes of the law. This means the founders are not personally responsible for the company’s legal or financial obligations beyond their invested amount. In other words, their personal assets are protected from business liabilities.

To establish this legal separation and secure limited liability protection, a business must:

• Formal registration with a unique name and address
• A defined ownership structure with shareholders or members, with liability limited to their investments 
• Articles of association and a partnership agreement 
• Separate financial accounts 
• Compliance with obligations specified in their respective laws on issues of filing and tax

This ensures the business operates as a separate legal entity, safeguarding the personal assets of its founders.

What is the main characteristic of an LLP according to the Limited Liability Partnership Act of 2000? 

The defining characteristic of a Limited Liability Partnership (LLP) is the liability protection it offers to its members. Members are shielded from personal responsibility for the partnership's debts and obligations, with their liability typically limited to their investment in the LLP. However, all members may still be liable for the wrongful acts of another partner if those acts were performed within the scope of the partnership.

What are the benefits of an LLP? 

An LLP offers unique features that set it apart from other business structures. It provides flexibility, protection, and confidentiality for its members. 

Below is an overview of its most notable benefits: 

1. Separate legal entity — A key characteristic of an llp and an offshoot of the limited liability principle is that an LLP is a separate legal entity from its owners. This means the LLP has its legal identity and can enter into agreements, own property, and conduct business in its name. This separation protects the personal assets of its members, as the LLP itself is responsible for its obligations and liabilities.
2. Appointment of a designated partner - During the formation of an LLP, the partners must appoint at least one designated partner responsible for critical administrative and compliance tasks, such as:some text
   • Preparing and filing confirmation statements and annual accounts.
   • Reporting changes, such as a change of address, to Companies House.
   • Appointing an accountant or auditor as required.
   • Overseeing the statutory compliance of the partnership and its members.
3. Tax principle - An LLP operates as a pass-through entity for taxation purposes. This means that the LLP itself does not pay tax on its profits. Instead, the profits are "passed through" to the individual members, who are taxed on their share of the profits. Each member must file a self-assessment tax return to report their income.
   In addition to the members' tax obligations, the LLP must file an annual partnership tax return through the self-assessment system to declare the overall profits and distribute them among the members.
4. ‍Profit distribution - The partnership deed governs how members distribute profits in an LLP. Unlike in a limited company (Ltd), where profits must typically be distributed according to shareholding percentages, an LLP allows for greater flexibility. Profit distribution can combine fixed shares and discretionary amounts, enabling members to agree on arrangements that best suit the partnership's needs and contributions.
5. ‍Confidentiality — An LLP allows professionals to maintain confidentiality regarding partnership arrangements and profit distribution. Unlike an LTD, whose articles of association are publicly accessible on the Companies House register, the terms of an LLP's partnership deed remain private.

See also: What is the difference between ltd and limited in a company name?

What are the disadvantages of an LLP?

While an LLP offers many benefits, it has certain drawbacks, particularly regarding reporting, disclosure, and taxation.

1. Complex reporting requirements - Due to its limited liability status, an LLP has reporting obligations similar to those of a limited company. These include:
   • Maintaining a registered office address.
   • Keeping a statutory register, including details of persons with significant control (PSCs).
   • Filing annual confirmation statements.
   • Reporting changes to Companies House, such as member details or address updates.
     These administrative responsibilities can be time-consuming and require additional resources to manage effectively.
2. Disclosure requirements - An LLP must disclose specific information publicly, which can disadvantage those prioritising privacy. This includes:
   • Names, month and year of birth, and service addresses of members.
   • Details of persons with significant control (PSCs).
     This lack of complete confidentiality can deter professionals who wish to keep their business arrangements private.
3. Taxation of profits - Profits in an LLP are taxed in the year they are earned, irrespective of whether they are distributed to members or retained within the business. Additionally, LLP members are subject to National Insurance Contributions (NICs) on their income.
   This taxation structure makes LLPs less tax-efficient than limited companies, where profits are taxed only when extracted (e.g., through salaries or dividends). This difference can result in a higher overall tax burden for some businesses for LLP members.

Read more: Register Your Company and Get a Certificate of Incorporation

What is the role of an LLP partner? 

The role of an LLP partner is typically defined in a partnership agreement and encompasses responsibilities that often mirror those of a company director, particularly in statutory compliance. Partners are collectively responsible for the business's effective management and strategic direction. 

Their primary responsibilities include:

• Overseeing the business's daily operations to ensure smooth functioning and alignment with its objectives.
• Setting the overall direction of the business by defining goals, formulating procedures, and driving long-term growth strategies.
• Ensuring compliance with all legal and regulatory requirements, such as timely filings, accurate record-keeping, and adherence to self-assessment tax deadlines.
• Acting in the best interests of the business, its clients, and other partners, maintaining trust and fostering collaboration.
• Overseeing financial matters, including the distribution of profits and losses, while ensuring the business's financial stability.

An LLP partner’s role requires a balance of operational management, strategic leadership, and a commitment to the partnership’s legal and financial obligations.

What are the tax advantages of an LLP? 

LLPs offer several tax advantages compared to limited companies, making them an attractive business structure for many professionals and entrepreneurs. Key benefits include:

• An LLP is a pass-through entity, meaning the tax obligations are passed directly to the partners. Partners are taxed on their share of the profits at personal income tax rates, avoiding the double taxation faced by limited companies, where the company pays corporation tax and directors pay dividend tax.
• Income tax brackets can often be lower than corporation tax rates, providing additional tax efficiency for many LLP members.
• LLPs allow profits to be distributed flexibly, reflecting each partner's contributions, skills, and other merits. This flexibility is unlike limited companies, where profit distribution is typically tied to shareholding percentages.
• LLP partners are not subject to benefits-in-kind taxes, often applicable to directors of limited companies for perks like company cars or private health insurance.

These tax advantages make LLPs an appealing option for businesses seeking flexibility in profit distribution and more streamlined tax obligations.

Do LLP partners pay tax?

Yes, LLP partners must pay tax and National Insurance Contributions (NICs) through the self-assessment system. Partners are taxed on their share of the LLP’s profits, and they must ensure they meet the self-assessment deadlines set by HMRC for notifying liability and settling their tax bills.

What are the advantages of forming an LLP over a traditional partnership, limited partnership or private limited company?

An LLP offers a unique structure that differentiates it from traditional partnerships, limited partnerships, and private limited companies. These differences provide advantages, including greater flexibility, liability protection, and tax benefits.

See also: Company Limited by Guarantee

What are the differences between LLPs and limited companies?

What Are the Differences Between LLPs and Limited Companies?

While LLPs and limited companies (LTDs) offer limited liability protection, they differ significantly in structure, reporting obligations, taxation, and profit distribution. The table below highlights the key differences.