Before considering a business address, you have to know what kind of company registration is most suitable for your business’s needs. If you’re looking to set up a limited liability partnership, this article will outline all you need to know to better understand the implications of limited liability partnerships and help you make an informed choice.
The Definition of a Limited Liability Partnership
Just like a limited company, a limited liability partnership (LLP) is a type of incorporated business structure introduced by the LLP Act 2000. It is mostly suited to professions that tend to run as a traditional partnership, such as solicitors, accountants, dental practitioners, etc.
Once limited liability partnerships are incorporated with Companies House, they receive independent legal status, offering limited liability to their members. This has many advantages as the personal finances of members are safeguarded more than their capital contribution or any financial commitment they might have made to the limited liability partnership.
Comparing Limited Liability Partnerships With Traditional Partnerships
A “partnership” is defined as a company structure formed by two or more people. Partnerships can function as traditional partnerships or limited liability partnerships. The pivotal difference in the two is found in the respective partners’ financial responsibility.
In traditional partnerships, the total company debts rest with the partners. However, in limited liability partnerships, partners have less financial liability. As a side note, limited company owners enjoy the same financial relief.
Comparing Limited Liability Partnerships With Limited Companies
Both limited companies and limited liability companies must be incorporated at Companies House under the Companies Act 2006 and the LLP Act 2000, respectively. Additionally, both limited liability companies and limited companies have a number of similarities and differences:
Private Limited Companies
- May be limited by shares (for-profit) or limited by guarantee (non-profit)
- Must have at least one shareholder/guarantor (owner) and one director (manager) – one individual can undertake both roles
- A registered office address is needed in the same UK location where the company was incorporated — England and Wales, Scotland, or Northern Ireland
- Corporation tax is paid on all profits
- Annual accounts, a confirmation statement and a Company Tax Return must be filed each year
- Shareholders receive a share of the company’s profits (dividend payments).
- Shareholders’ rights, responsibilities and liabilities are determined by the number, class and value of their shares
- The internal structure and management guidelines are outlined in the articles of association and shareholders’ agreement
- Companies that are limited by shares may sell shares in exchange for capital investment
- PSC registers have to be maintained
Limited Liability Partnerships
- Must be a profit-making business
- Must perpetually assign at least two partners (members), of which at least two must be designated members and fulfil legal responsibilities on behalf of the whole limited liability partnership
- There are no shares, shareholders or directors
- A registered office address has to be located in the country of incorporation
- No corporation tax – each limited liability partnership member pays tax via Self-Assessment as a self-employed individual
- Companies House has to receive a limited liability partnership’s annual accounts along with an annual confirmation statement
- Limit of each member’s liability is agreed between the members (traditionally outlined in a partnership agreement)
- Presence of a flexible internal structure that may be changed at any time and as frequently as desired
- Capital investment cannot be received in exchange for ownership from non-LLP members as a limited liability partnership does not have shares
- PSC registers have to be maintained
The Advantages of Limited Liability Partnerships
Whenever limited liability partnerships endure financial issues or a member is prosecuted, the liability of each member is limited to the money they have contributed to the partnership.
Limited liability partnerships are not taxed as corporations. Their profits are taxed via Self-Assessment. However, they must pay Corporation Tax. Members in limited liability partnerships have to pay National Insurance and Income Tax via Self-Assessment on individual share of business gains.
The internal administrative make-up of limited liability partnerships is just as flexible as a traditional partnership. Modifications can be made simply to the legal rights and responsibilities of the partners as well as alterations to their capital investment and profit-sharing ratios.
Limited liability partnerships enhance the professional image of a company. Invariably, this is more appealing to other companies and larger entities — particularly advantageous with regards to high-value contracts.
Easy appointment of new members
Since there are share capitals in limited liability partnerships, you needn’t transfer or issue additional shares for bringing in new members. New members’ appointments require an agreement with existing members.
No articles of association
Limited liability partnerships do not need articles of association in order to regulate the relationships between members and the actual LLP. Internal regulations may be conveyed in a partnership agreement. This is an optional private document, therefore making amendments is not a difficult process. If there is a lack of partnership agreement, each member will be viewed as having equal rights and responsibilities.
National insurance savings
Limited liability partnerships have no registrable liability as an employer if the only people working through the company are members. No requirement to pay Class 1 Employers’ National Insurance is needed, neither are Contributions on any profit paid to members.
There is no legal requirement to hold board meetings or general meetings.
The Disadvantages Limited Liability Partnerships
Financial accounts and members’ details have to be disclosed to Companies House and be displayed on public record.
Self-Assessment Income Tax may be as high as 45%, whereas Corporation Tax is charged at a flat rate of 20%.
Less effective tax planning
Members must pay Income Tax in the fiscal year wherein income is received. If limited liability partnerships’ profits remain in the company as working capital, partners will be required to pay National Insurance and Income Tax for that profit.
Gaining equity investment is difficult. There is no share capital structure in limited liability partnerships, so you’re not permitted to sell segments of the business to non-members.
Only appointed members who are active in the running of a business can invest capital in an LLP. Limited liability partnerships can only receive loan capital from non-members.
Details must be maintained at Companies House and any changes have to be reported within a certain timeframe. Financial accounts and annual returns must be prepared for Companies House every year.
Limited liability partnerships are legally required to maintain accurate and updated statutory records and registers at its registered office. The registered office of an LLP may inspect statutory registers and records. Any individual or organisation can request to view these official documents for appropriate means.
Lack of suitability
Limited liability partnerships are not suitable for carrying out non-profit or charitable work. Limited liability partnerships cannot be formed with the objective of staying inactive for an indefinite time period since limited liability partnerships have to be registered with the aim of trading and making profits.
Limited liability partnerships must have a registered office address in one UK jurisdiction.
A service address has to be provided by each member in order to receive statutory email.
Selected limited liability members
At least two partners in limited liability partnerships have to be formally selected as “designated members” during the incorporation process. All members are selected by Companies House if no such nominations were made. Designated members carry the responsibility for registering the limited liability partnership at Companies House and ensuring the partnership and its members adhere to all statutory requirements. Their duties should be clearly stated in any formulated partnership agreement. Such duties should include:
- Completing and delivering annual returns to Companies House
- Preparing and signing partnership accounts
- Delivering the partnership account to Companies House
- Providing copies of partnership accounts to all members
- The selection of an auditor and an accountant
- Updating the statutory records and registers in the limited liability partnership’s custody
- Ensuring every member correctly fulfils their Self-Assessment tax returns on time
- Keeping Companies House updated whenever the LLP’s or members’ details change
- Messaging Companies House whenever members leave or join the partnership
- Enrolling the business for VAT and PAYE (when needed)
- Signing agreements and documents in favour of the enterprise
- Making sure all obligations are satisfied
- Working on behalf of the partnership in response to any winding up scenario
Registering Limited Liability Partnerships
Limited liability partnerships are normally registered online and with the assistance of a credible company formations agent within three hours (without any documents, signatures or personal meetings). Simply enter your limited liability partnership information on a web-based application form and send it to Companies House. Once your registration is approved, your limited liability partnership may start trading.
You must provide a unique business name and choose the country where you prefer your limited liability partnership to be formally licensed (Scotland, England and Wales, or Northern Ireland). Likewise, must provide an authorised office address in the same country. This particular address will be recorded at Companies House for the purpose of notification and mentioned on public record.
Limited liability partnerships are advisable if you wish to structure your business like a flexible partnership. If you wish to form a joint business enterprise in professions such as dentistry, legal firms, accountancy, or surveying, then limited liability partnerships are the way to go. Importantly, limited liability partnerships are your best option if your current partnership offers to perform business functions that could most likely result in liability claims.
To find out more information about limited liability partnerships (LLPs), or if you want to register a business address for your company, contact Your Virtual Office London, today.