When starting a business, choosing the right structure, like a Limited Liability Partnership or limited company, can be confusing. Both have advantages and disadvantages, and what works for one company may not work for another.
We explain how they differ, who finds each structure most useful, and how to get started.
Tax in a Limited Company Versus An LLP
One of the main differences between limited liability companies and LLPs is tax treatment. A limited company is completely separate from the people in the company, so for taxes this means:
● A limited company pays tax itself by paying corporation tax on all taxable profits.
● The directors tax separately the income they earn from the business. Their income could come from a salary the company pays them. If the directors are also shareholders, they may also receive a share of the company's profits in the form of dividends.
An LLP as a corporation is not taxable, but the members are. So no corporate tax return and no corporation tax for an LLP. Instead, the untaxed profits are distributed to its members. They then pay tax on the value of their share by completing a self-assessment tax return.
So, What's the Best Option Between LLP vs LTD?
Both LLPs and limited companies are well-known and widely used business vehicles in the UK that offer flexibility and limited liability. When comparing, it is important to consider what is best for the company in question and its required structure, as well as the type of business. Comprehensive legal and tax advice should be sought before a decision is made on the most suitable legal form.
Other Similarities and Differences for Companies and LLPs
Both limited companies and LLP are registered with Companies House and are both required to file annual accounts, but the way they raise funds and pay members out of the company is different.
The company can sell shares for an investment - basically, you sell part of the company to raise money. There are no stocks, shareholders, or directors in an LLP, so they do not have this option.
Public Information for Companies and LLPs
While the information of a limited liability company is publicly available at Companies House, the version of an LLP (a membership agreement) is private.
Personal Liability for Limited Companies and LLPs
Limited companies are "limited" because they "limit" the personal responsibility of members of the company for any debts. In a limited company, the personal responsibility (or "liability") of owners is limited to the value of their investments or guarantees to society.
An LLP is a bit like a combination of a normal partnership in terms of tax liability. But like a limited liability company, each partner has a reduced financial liability. This means that the partners are not responsible for each other's behavior (or negligence).
The members agree on an amount that they guarantee to pay in the event of difficulties in the company and set this down in the partnership agreement, in which their rights and obligations are set out.
How Many People Do I Need To Set Up a Company Or an LLP?
LLPs should have at least two partners as designated members, but there is no maximum number. You could even form a silent limited company and use that as the second member in your LLP.
As a member of an LLP, you have to fulfill a number of tasks.
● Submission of annual accounts and confirmations.
● Registration of the LLP for self-assessment and, if applicable, VAT.
● Reporting changes to HMRC and Companies House if necessary.
● Maintaining accounts or appointing an accountant.
● Representing the LLP in all legal matters.
● Ensure that the LLP adheres to all forms of legal compliance.
It is not uncommon for an individual to own, manage, and register a limited company that acts as both director and shareholder.
Why Have an LLP?
So having an LLP is not for everyone. It doesn't work if you're looking to start on your own and may not be the best option if you are planning to grow your business or raise capital through the value of your stocks. In short, it's a good idea if you're a partnership looking to grow a little, or if you're involved in high-risk activities that might open you to liability.
Should I Start A Limited Company or an LLP?
Which structure you choose largely depends on your circumstances. LLPs are useful for companies that normally operate as a partnership, such as accounting firms or lawyers.
LLPs also cannot be used for charitable purposes, so if you need to operate a charitable company, consider forming a limited company.
Reasons To Set Up a Limited Liability Partnership
A partnership is a good idea if you plan to do business with other people. In an LLP, you can continue to protect your personal assets if the business fails.
An LLP is also more flexible when you know you want to add or remove people in the business, whereas the structure of a limited liability company is more rigid. However, for some people, this is a good thing, as everyone in the company must agree to the changes.
Reasons to Choose a Limited Company
If you plan to raise money for the company (or sell part or all of the company in the future), you can do so by running a limited partnership. You must also start a business if you want to run a nonprofit organization.
More Information on LLP vs. LTD
We hope this is a useful summary for your understanding. However, if you need further advice or assistance, please do not hesitate to contact us.