A Limited Liability Partnership (LLP) is a way to structure your business as a hybrid between a partnership and a limited company.
As an LLP, your business has a separate legal personality. It can sign agreements, enter leases and offer fixed and floating charges over assets as security. Importantly, as its own legal entity, the business can hold assets. That means that the assets are kept separate from the directors and partners, and they are not personally liable for debts of the LLP. That’s why it’s a partnership with ‘limited liability’.
In that way, the LLP structure is similar to a limited company. But structuring your business as an LLP gives you a little more flexibility in the way you run the organisation. LLPs are not required to hold board meetings, or shareholder meetings, or make decisions by resolution. So you can be a bit more dynamic in decision-making.
It also means that you can distribute profits in a more flexible way and it’s easier to vary profit allocation between the partners.
When is an LLP a good idea?
An LLP is a good idea for a business that has two or more members, and the partners want an element of flexibility when it comes to profit sharing.
It’s often popular with professional services firms who have different ‘grades’ of partners, or distribute profits according to the amount of work they bring in. You often see firms of accountants, solicitors, architects, consultants, and surveyors opt for the LLP structure.
It works well for growing businesses. Behind every growing business is a high level of investment from the partners, and they will want to protect their liability if anything goes wrong. LLPs offer a level of protection that isn’t available to partnerships.
One thing that might sway the decision in how to structure your business is the level of tax you’ll end up paying. An LLP is taxed as a partnership, which means that the business won’t pay corporation tax. Instead, partners pay tax on their earnings, including their share of the profits.
On the other hand, companies pay corporation tax, which is now at 25% (raised in April 2023 from 19%). Then profits are paid out as salaries or dividends. The rate of tax on extracting profits tends to be lower in companies.
It’s worth getting specialist tax advice on your particular circumstances before you make your decision for structuring the business. The discrepancy between the tax position of the different structures can be surprisingly wide.
One final thing to bear in mind is that it is often more efficient to structure your business as a company if you’re trying to build up cash within the business. That’s in part due to the tax position, but it’s also because companies can retain profits. In contrast, LLPs have no option to retain profits for the following year. All of the profits of an LLP must be distributed in the same financial year.
If you’re thinking about structuring your business as an LLP or a limited company, we’re happy to have a chat with you about the legal aspects of what’s involved. Please get in touch with our experts at SME Comply.