LLP vs LTD?
As the owner of a small business, when you decide to “go limited” you have two choices – private limited company (LTD) or a limited liability partnership (LLP). When there are only 2 or 3 of you in the business it can be hard to make the choice – and it may not make much difference either way in the early days. The answers lie in your plans for the future…
For further help with your decision you are welcome to speak with us directly. Click for help from an advisor (top right) or contact us by phone (0117 370 2725) or email.
The ‘Limited Liability Partnership” (LLP) format of registered company was originally created to enable the professions to take advantage of limited liability, but its popularity is growing among a much wider range of business. An unregistered Partnership has no protection if things go wrong ALL or ANY of the Partners can be held liable for the debts of the other Partners even to the point of bankrupting the individuals. By registering as a Limited Liability Partnership (LLP) the Members (Partners) protect their private assets. If the business fails the Members only lose the money they have actually invested in the Partnership. ORDER NOW to protect your interests.
A limited liability partnership does not have Directors or a Company Secretary, but it must have at least two designated members who stand as the company’s primary representatives in much the same way as Directors.
The LLP is subject to many of the same rules as a traditional “private company limited by shares”, for instance the LLP must report changes to its registered details (including members names and addresses), it must complete a Confirmation Statement (formerly Annual Return) and it must file Accounts each year. An LLP must have at least 2 Members (Partners).
LLPs must be formed for active trading – they cannot be registered as dormant. A statement on the Companies House forms for LLP registration confirms that the registrants are joining in business for the purpose of making a profit. That excludes non-profit enterprises (such as clubs or charities) and it also excludes non-trading companies (“dormant companies”).
Our LLP formation process is electronic so, if you ORDER NOW your LLP will be registered within one working day.
The key difference that affects the view of many start-up businesses is the tax treatment of the owners (members). In a traditional LTD the Directors (who are also usually the sole shareholders in a start-up company) are treated as employees of their own company. This means that their salary is subject to personal Income Tax and National Insurance and employers’ NI contributions. Profits left in the company (not withdrawn as salary) are subject to the (lower) Corporation Tax rate.
The members of an LLP pay Income Tax as self-employed persons, so there is no employers’ NI to pay. On the other hand, ALL the profits of the company are regarded as the members’ income and are subject to Income Tax.
So the balance of tax advantage depends on how much profit the company might make and how much the owners pay themselves.
If the company expects to employ people and the employee’s payroll is likely to be higher than the owners’ salary, a “private company limited by shares” may well be more tax efficient that a “limited liability partnership“.
If the business is likely to remain as just two or three members who are each making a similar contribution and each draw similar salaries then the LLP option will probably be more tax efficient.
It is wise to discuss the options with your tax accountant.
One other important factor should be weighed in the balance: how likely is it that the business will be sold as a going concern? A “private company limited by shares” (LTD) is more anonymous and easier to separate from the owners by means of transferring the shares. A partnership is more personal and therefore less straight-forward to separate from the owners. Either way, if the business is good and profitable, someone will buy it. So the difference is in the administrative detail rather than the financial outcome.
Yes, LLPs can have corporate members (companies). This can be a convenient method of linking the advantages of the two formats. For more information about this option read the article “LLP- the corporate option”.
There is no absolute rule that makes one format better than the other. In any case, if your business changes over the years so that the alternative format becomes more appropriate, it is possible to form a new company of the other type – then transfer the business over to the new company.
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