Table of Contents
Incorporation is a relatively linear process, draft an LLP agreement and file the relevant documents to the Companies House. Upon which, your LLP is then legally formed and can pursue its intended business activity. The following article is a quick rundown of what you need to know and can expect when registering for a UK LLP.
What is an LLP?
A Limited Liability Partnership (LLP) is known across many jurisdictions as a corporate vehicle similar to an LLC (Limited Liability Company). As you can infer, “Limited Liability” is one of its main selling points, by which members can shield themselves from each other’s mishaps and negligence.
Note that an LLP does not have the concept of shareholders and the founding members themselves act as the directors. In this respect, a partnership agreement is often drafted upon incorporation to provide further details about the administrative rights and obligations of each member.
How does it compare to an LTD?
The following comparison between an LLP and an LTD will point out their similarities and differences to assist your decision-making.
Separate legal entity: Both entity types are categorized as separate entities upon incorporation. Your LLP now has a set of rights and obligations similar to that of a normal person.
In terms of legal capacity, they both can enter contracts, hold properties, and sue or be sued under their own names.
However, an LLP has a particular statutory feature that makes it an outlier of the two when it comes to this regard. If there remains only a single member running the LLP within a 6-month period, then by default the separate legal entity status no longer applies.
Synonymously, the existing member is therefore made jointly and severally liable for all incurred debts of the LLP during that time.
Incorporation procedure: All corporate formations in the UK are administered by its main authoritative figure known as the Companies House. You can click on the following embedded links for more details on incorporating an LLP or an LTD in the UK.
Filing compliance: The Companies House mandates the creation and retainment of a register of people with significant control for both LLPs and LTDs. Additionally, annual LLP accounts must be provided within 9 months after the accounting reference date (ARD). This is to inform the Companies House of the partnership’s financial performance and activities.
A confirmation statement is also required for both entity types to substantiate that the accounts, among other preliminary information, are up-to-date.
Confidentiality: The Companies House doesn’t require the Partnership Agreement to be stored within its Registrar. In other words, organizational information is kept from public scrutiny. This is a stark contrast to an LTD whose submission of the Articles of Association is by law required to be made publicly available.
Within the Partnership Agreement typically includes, among others, the following details:
- Profit and loss sharing
- Shares in capital
- Provisions on joining/exiting
- Dispute management
- Business objective(s)
Despite not being a statutory requirement, it’s still beneficial for LLPs to have a Partnership Agreement. It acts as a solid constitutional ground where trust and cooperation among members can foster. All of which is essential for long-term growth and stability.
Recordkeeping:Unlike LTDs, LLPs are not obligated to hold and maintain record details of meetings between Members. members. However, it is still best practice to designate suitable personnel for this. Aside from being an objective and focused database for future references, minutes can also serve in courts of law as legal admission.
Taxation: Incorporating as an LLP grants a business pass-through taxation status, i.e., corporate tax is processed through members’ personal tax returns instead.
LLPs that have non-UK members and do not conduct business in the jurisdiction can enjoy local tax relief. However, the members are still subject to taxation within their own country of residence.
As a partnership member, your individual interest percentage will decide the number of credits and deductions that passed through the partnership to you.
On the other hand, an LTD is treated as a separate entity and is therefore subject to corporation tax based on its earnings. Taxpayers in the LTD, shareholders and directors, will also have to pay tax on any dividends or salaries paid.
Flexibility: All corporate vehicles have some level of organizational flexibility to accommodate the need for growth of a business.
An LTD can make adjustments to its organizational structure by amending them to its Articles of Association. However, this is done through extensive considerations of legislative confinements of the Companies Act 2006.
For members in a partnership, this is much more convenient and simple as they can have full freedom to negotiate and resolve disputes as the guidelines for doing so have already been pre chartered in the bylaws.
Tired of sifting through endless paperwork to understand jurisdictions’ compliance requirements? Our guide can help!Try Now
When to choose a UK LLP?
An LLP is viable for when you already have a general partnership but want to scale up or you’re in a line of work that requires liability protection, e.g., doctors, solicitors, auditors, etc. It’s also worth noting that pass-through taxation comes at a cost.
Presumably that you’re a member with a directorial role in your LLP, your earnings are subject to Employer Tax (PAYE) and National Insurance Contribution (NIC). This makes the LLP become less tax efficient as you employ more people in the future.
In other words, expansion becomes more restrictive. In such an event, an LTD proves to be more efficient in the long run, both structurally and financially.
It’s possible to make the transition from an LLP to an LTD later on if you want headroom for growth. Therefore, take into account what would become of the partnership in the distant future and discuss the propositions with other members in advance before proceeding.
What to consider when starting an UK LLP in 2024?
Starting a Limited Liability Partnership (LLP) in the UK involves considering various factors to ensure a well-informed decision. Here are some key considerations:
Legal and regulatory compliance: Ensuring that your LLP complies with all relevant laws and regulations is crucial. This includes registration, licensing, and compliance with tax and employment laws.
Financial planning: Carefully plan your LLP’s finances, including startup costs, ongoing expenses, and revenue projections. Secure adequate funding to cover initial expenses and sustain your business until it becomes profitable.
Partnership agreement: If you have multiple partners in your LLP, draft a comprehensive partnership agreement that outlines each partner’s rights, responsibilities, and share of profits and losses.
Remember that no single corporate structure is the be-all and end-all in the grand scheme of things. They are different by design to accommodate different needs.
If you deem a UK LLP as a fitting corporate structure for your business, we would be more than happy to help you through the incorporation process. Just simply drop a message or get in touch with us via email@example.com
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
Industry News & Insights
Get helpful tips and info from our newsletter!
Stay in the know and be empowered with our strategic how-tos, resources, and guidelines.