New consultancy owner asks:
I’m just about to open my new consultancy, and I’m exploring the structure options. I was just going to form a limited company, but someone mentioned an LLP to me. Can you explain the main differences?
Acumenica answers:
In the United Kingdom, both limited companies and limited liability partnerships (LLPs) are legal structures that offer a level of liability protection for their members. However, there are some key differences between these two business entities:
Legal Structure
Limited Company: A limited company is a separate legal entity from its owners (shareholders). It can be structured as a private limited company (Ltd) or a public limited company (Plc). Shareholders' liability is limited to the amount unpaid on their shares.
LLP: An LLP is a hybrid structure that combines features of a traditional partnership and a limited company. It is considered a separate legal entity but is not as distinct as a limited company. Members of an LLP have limited liability, but they are also actively involved in the management of the business.
Liability
Limited Company: Shareholders in a limited company have limited liability, which means that their personal assets are protected in case the company incurs debts or faces legal issues. The shareholders' liability is typically limited to the value of their unpaid shares.
LLP: In an LLP, members have limited liability as well, but they are responsible for their own actions and those of employees under their direct supervision. This means that a member's personal assets are generally protected from the business's debts or legal obligations, except in cases of personal negligence or misconduct.
Management and Ownership
Limited Company: Limited companies have a more flexible ownership structure. They are owned by shareholders and managed by directors. Shareholders can be passive investors who are not involved in day-to-day operations.
LLP: LLPs are typically managed by their members, and all members are actively involved in the business. Each member may have a say in the management and decision-making processes.
Annual Filings and Disclosure
Limited Company: Limited companies are subject to strict reporting and filing requirements with Companies House. This includes annual financial statements, director information, and other statutory documents that are publicly available for scrutiny.
LLP: LLPs also have reporting requirements, but they are generally less extensive than those of limited companies. Members' information, including names and addresses, must be disclosed to Companies House and is publicly available.
Taxation
Limited Company: Limited companies are subject to corporation tax on their profits, and shareholders may be liable for income tax on any dividends they receive.
LLP: LLPs are not subject to corporation tax on their profits; instead, members report their share of the LLP's profits on their individual tax returns. This can result in different tax treatment for LLP members compared to shareholders of a limited company.
A significant issue for LLP members is the inability to defer tax by not drawing income from the company: LLP members pay tax on their share of profits regardless of whether the funds are retained in the business or taken as drawings/salary. Ltd Co shareholders can choose to defer drawings funds from the business and only the company would pay tax on the profits. There wouldn’t be an additional income tax charge on the shareholders until a dividend is drawn or capital is extracted. This can be a very useful tax planning strategy.
Transfer of Ownership
Limited Company: Transferring ownership in a limited company is typically easier, as shares can be bought and sold without major structural changes.
LLP: Transferring ownership in an LLP may require amendments to the partnership agreement and can be more complex.
