Limited Liability Partnership should be a familiar term in the corporate world by now. In the UK, its popularity stands on par with the Limited Liability Company (LLC) type. Although an LLP is fit for trading and other commercial activities (with certain restrictions applied), it is more coveted in the professional services industry given its bespoke legal features.
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.
Table of Contents
1. 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 into the administrative rights and obligations for each member.
2. 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.
3. 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.
4. What is it like to incorporate one in 2021?
4.1. Post-Brexit implications
As the UK was taking on a new shape after ratifying its withdrawal agreement from the EU, the corporate landscape also underwent drastic changes in conjunction.
Since UK and EU Trade and Cooperation Agreements do not provide a solid legal framework for intra-state lawyering for non-EU(UK) professionals. Solicitors from any other non-EU (now including the UK) countries are now effectively subject to 27 different regulatory regimes.
This introduced major disruption in the professional services industry, particularly for law firms and auditing firms registered under LLPs. In short, UK-based solicitors now have to get licensed locally in order to practice pan-EU law advising.
Of course, this also affects other EU-headquartered UK law firms that onboard locally qualified lawyers. Since there’s not an official bilateral agreement for UK law practitioners to fall back on yet, staffing and recruitment may become difficult in the future.
Since the UK is an official outlier now, firms will also have to reevaluate their ownership and travel arrangements. This is due to the LLP structure no longer having prior benefits such as limiting the liability of partners or its pass-through taxation feature.
Despite these challenges, some firms have already made adjustments to adapt to the new reality. Firms are now converting to other EU jurisdictions that offer reliefs for the continuation of a UK LLP such as France and Germany.
In France, the Paris Bar and French Government have already revamped the Transnational Agreement (TNA) to enable grandfathering of UK LLP structure post-Brexit. Germany also allows the operation of a UK firm under the LLP structure. The condition being that administration is made elsewhere besides the UK.
4.2. EU e-Commerce VAT changes
As of 1st July 2021, the EU’s latest VAT tax reforms came into force which aims to eliminate the challenges in cross-border online selling within its realm.
Hallmarks of which are the introduction of the new optional pan-EU VAT reporting platforms, namely Import One-Stop-Shop (IOSS) and the One-Stop-Shop (OSS). The goal was to alleviate the VAT declaration and optimize remittance in cross-border selling.
A UK-based B2C that chooses to opt for an OSS can enjoy a streamlined VAT reporting procedure. Instead of having to report to every EU member state that it sells to, a declaration to one of them is now enough.
Additionally, if the goods are imported from outside of the EU then an IOSS is also a nice addition to have. With it, customs clearance becomes faster and customers gain full visibility in terms of price at the point of sale, i.e., no surprise fees.
Since every UK business is now considered a non-EU business, they may have to appoint a fiscal representative to file non-resident VAT returns. This may also apply when registering for IOSS.
However, the VAT mutual assistance Protocol may relieve the UK of fiscal representation requirement in some EU states that normally mandate it.
Currently, the following countries that require fiscal representation from a UK business ensuing Brexit are, among others, as follows: Austria, Bulgaria, Estonia, Greece, Hungary, Portugal, Romania, Slovenia, Spain, Italy, Germany, Greece, Cyprus, Croatia, Lithuania, Sweden, Iceland, Norway and Switzerland.
However, this regiment is not yet set in stone. Just months after Brexit, Poland was the first country to have since withdrawn its fiscal representation requirement for UK businesses. Additionally, there are talks about Denmark preparing to follow this as well.
* For absolute clarity on this matter, we recommend that you seek professional counseling from a reputable accounting & auditing firm.
Remember that no single corporate structure is the be-all and end-all in the grand scheme of things. They’re 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 firstname.lastname@example.org