A guide to Limited Liability Partnerships

Limited Liability Partnerships (LLPs) represent a blend of general partnership structures with the benefits of limited liability for its members.

In England, LLPs have become a preferred choice for businesses looking to combine the operational flexibility of a partnership with the protective shield of limited liability.

Understanding LLPs: Structure and formation

An LLP is a legal entity separate from its members, providing them with protection against personal liability for business debts. It is incorporated in the UK under the Limited Liability Partnerships Act 2000 (as amended) This structure allows the business to operate with the flexibility of a partnership while ensuring that personal assets of the members are safeguarded.

Key features of LLPs:

• Legal entity status: An LLP is a corporate body and a legal entity sperate from its members. LLPs are incorporated by registration at Companies House.
• Capacity: LLPs have unlimited capacity and can do anything that a legal person is able, including owning assets and entering contracts.
• Limited Liability Protection: Members are protected from personal liability beyond their investment in the LLP.
• Tax efficiency: LLPs are taxed as partnerships, with profits distributed to members taxed as personal income.
• Operational flexibility: LLPs enjoy flexibility in management and distribution of profits, similar to general partnerships.
• LLP Agreement (LLPA): If an LLPA entered into between members are private and not required to be filed publicly at Companies House.
• Share capital: It has no share capital and there is no obligation to contribute capital. An LLP member therefore cannot be required to contribute capital unless required to do so under an LLPA.

How to set up an LLP

Choose a name

Select a suitable name for your LLP. Ensure that the chosen name complies with the regulations set out by the Companies House and is not already in use by another business. An LLP must be incorporated with a name ending with “limited liability partnership”, “llp” or “LLP”.

Registered office address

Decide on a registered office address for your LLP. This address will be publicly available and will be used for official correspondence.

Appoint members

LLPs must have at least two designated members who are responsible for managing the business and complying with legal obligations. Members are often called “partners” as well. LLP members may be individuals or companies. All individual members must be at least 16 years old and not an undischarged bankrupt or person disqualified from being either a member of an LLP or a company director under the Company Directors Disqualification Act 1986.

Draft LLP agreement

Put an LLPA in place that outlines the rights, responsibilities, and profit-sharing arrangements among the partners. While an LLPA is not a legal requirement, it is highly recommended to avoid potential disputes in the future.

Register with Companies House

File the necessary documents with Companies House to register your LLP. This includes completing the application for the incorporation (Form LL IN01), which provides details about the LLP, its registered office address, and the partners. The incorporation process can be done electronically or via filing paper documents.

Pay registration fee

Pay the registration fee to Companies House, which varies depending on whether you submit the documents online or by post.

Receive certificate of incorporation

Once Registrar of Companies approves the registration, you will receive a Certificate of Incorporation, confirming that your LLP is officially registered and legally recognised.

Register for taxes

LLP are generally not subject to corporation tax. Instead, LLPs are treated as transparent for tax purposes, meaning the individual partners are taxed on their share of the LLP’s profits, rather than the LLP itself being taxed as a corporate entity. Need to arrange VAT (Value Added Tax), and PAYE (Pay As You Earn) registration if applicable.

Maintain compliance

Ensure ongoing compliance with legal requirements, including filing annual accounts, confirmation statements together with any other applicable forms regarding changes with Companies House, maintaining proper accounting records, and complying with tax obligations.

Inform stakeholders

Inform relevant stakeholders, such as clients, suppliers, and banks, about the establishment of your LLP and any changes to your business operations.

By following these steps and meeting the necessary legal requirements, you can successfully set up a LLP and commence your business activities. It is advisable to seek professional advice from a solicitor, as Moore Barlow to ensure compliance with all legal and regulatory obligations.

Advantages of operating as an LLP

LLPs offer several benefits to their members, making them an attractive business structure. Here are some of the key advantages:

Limited liability

One of the primary benefits of an LLP is that it provides limited liability protection to its members. This means that the personal assets of the members are protected from the debts and liabilities of the business. Members may have to contribute to the LLPs assets only in certain circumstances and they are only liable for the amount they have invested in the LLP, shielding their personal wealth from business risks.

Flexibility

LLPs offer flexibility in terms of management and ownership structure. Members have the freedom to determine their roles, responsibilities, and profit-sharing arrangements according to the needs of the business. This flexibility allows for the creation of bespoke LLPAs tailored to the preferences of the members.

Tax efficiency

LLPs are tax-transparent entities, meaning that they are not subject to corporation tax on their profits. Instead, profits are allocated directly to the individual members, who are then responsible for paying income tax on their share of the profits. This can result in tax savings compared to operating as a traditional corporation.

Separate legal entity

Like a company, an LLP is a separate legal entity from its members. This provides credibility and professionalism to the business, allowing it to enter into contracts, own property, and sue or be sued in its own name. The separate legal entity status enhances the LLP’s ability to conduct business and enter into partnerships with third parties.

Continuity

LLPs offer greater continuity compared to sole proprietorships or partnerships. The death, retirement, or departure of a member does not automatically dissolve the LLP. Instead, the LLP can continue its existence with the remaining members or by admitting new members, ensuring business continuity and stability.

Attractiveness to professionals

LLPs are commonly used by professionals such as lawyers, accountants, and consultants due to the limited liability protection they offer. This structure allows professionals to collaborate and share resources while protecting their personal assets from professional liabilities.

Overall, LLPs offer a compelling blend of limited liability protection, flexibility, and tax efficiency, making them an attractive business structure for a wide range of ventures.

Considerations for LLP members

Responsibility for compliance

Designated members are responsible for meeting legal and filing requirements.

Disclosure requirements

LLPs must disclose financial information, similar to limited companies.

Profit distribution

Profit-sharing is governed by the LLPA, requiring clear agreements among members.

LLP agreement: A cornerstone for success

An LLPA outlines the rights, duties, and responsibilities of the members. This document is crucial for preventing disputes and ensuring smooth operation. It typically covers:

• Profit distribution methods;
• Decision-making processes;
• Procedures for adding or removing members; and
• Responsibilities of designated members.

LLP vs LTD

LLPs and Limited Companies (LTDs) are two common business structures in England, each with its own set of characteristics and considerations.

An LLP is a flexible form of business that combines the benefits of a general partnership with limited liability protection. In an LLP, members enjoy limited liability, meaning their personal assets are protected from the debts and liabilities of the business.

This structure is particularly popular among professional services firms, such as law firms and accountancy practices, where collaboration and shared ownership are important. In an LLP, management and ownership are vested in the members, who have flexibility in structuring their roles and responsibilities. LLPs are tax-transparent entities, with profits allocated directly to individual members, who are responsible for paying income tax on their share of the profits.

On the other hand, a LTD is a separate legal entity distinct from its shareholders. Shareholders have limited liability, meaning their personal assets are shielded from the company’s debts and liabilities. The management of a LTD is overseen by directors, who are appointed to make strategic decisions and run the business. LTDs are subject to corporation tax on their profits, and shareholders may receive dividends as a form of distribution of profits. LTDs are often perceived as more established and credible entities, which can be advantageous when dealing with customers, suppliers, and lenders.

The choice between an LLP and a LTD depends on various factors such as the nature of the business, its ownership structure, tax considerations, and regulatory requirements. Both structures offer limited liability protection, but LLPs provide greater flexibility in management and taxation, while LTDs offer greater regulatory oversight and credibility.

It’s essential to carefully evaluate the specific needs and objectives of the business before choosing the most suitable structure.

How Moore Barlow can help

LLPs offer a unique combination of flexibility, limited liability, and tax efficiency, making them an attractive option for many businesses in England. By understanding the structure, formation process, and operational considerations of LLPs, businesses can leverage this model to their advantage.

In forming an LLP, it’s crucial to put a comprehensive LLPA in place, understand the financial implications, and ensure that all statutory requirements are met. With these foundations in place, an LLP can serve as a robust platform for business growth and success.

Speak to our LLP solicitors to see how we can help you