Limited company or LLP?

Limited company or LLP?

Limited companies and LLPs share many similarities, most notably the reduced financial responsibility of the owners. However, they do have significant differences as well, namely:

  • Capital investment opportunities.
  • Flexibility of internal structure and members’ rights.
  • The allocation and taxation of business profits.

Choosing the most appropriate legal structure will depend entirely upon the kind of business you currently have, or plan to have in the future.

A company limited by shares is the most popular choice for profit making businesses. A company limited by guarantee is the best option for non-profit organisations. A limited company structure is also best if you plan to employ lots of people and/or you want the option of selling shares in your business to raise capital investment. It is also a more tax-efficient structure for many types of businesses.

The LLP format was introduced in 2001 by the LLP Act 2000 to meet the needs of certain professionals who usually form traditional partnerships, such as solicitors, doctors, accountants and architects.

LLPs provide the same benefits as traditional partnerships with the added advantage of reduced financial responsibility for the partners. An LLP structure is a good choice for businesses with minimal employees (if any) and only a few partners, each of whom makes similar contributions to the business, enjoys equal rights and responsibilities, and takes a similar share of business profits.

The main differences between a limited company and an LLP

  1. A limited company can be registered, owned and managed by just one individual – a sole person can act as both the director and shareholder (or guarantor). A minimum of two members are required to set up an LLP. However, one way around this is to set up a dormant limited company as the second LLP member.
  2. The liability of company shareholders or guarantors is limited to the amount paid or unpaid on their shares, or the amount of their guarantees. The liability of LLP members is limited to the amount each member guarantees to pay if the business runs into financial difficulty or is wound up.
  3. A limited company can receive loans and capital investment from outside investors. An LLP can only receive loan capital. It cannot offer equity shares in the business to non-LLP members.
  4. Limited companies pay corporation tax and Capital Gains Tax on all taxable income. LLP members pay Income Tax, National Insurance and CGT on all taxable income. The LLP itself has no tax liability.
  5. It is easier to change the internal management structure and distribution of profits in an LLP.
  6. A limited company can be operated as a non-profit business. An LLP must be set up with the intention of making a profit.

File your dormant company accounts here

Different tax liabilities of LLPs and limited companies

Limited company tax liability

All taxable income generated by a limited company is subject to corporation tax of 19%. Any salary a director receives will be liable for Income Tax, National Insurance and employers’ NI. However, directors are often also shareholders. This means they are treated as employees of their own company. The distribution of profits to directors can be done is such a way that much of the money they receive is not subject to corporation tax or personal Income Tax.

By paying a director a salary of no more than his/her tax-free Personal Allowance, and distributing additional profits by way of shareholder dividends, a director can legally minimise his/her personal tax liability. Dividends are paid from post-tax profits and the first £5,000 of payments are tax free. Additional dividend income is taxed at according to the tax bracket of the recipient.

LLP tax liability

LLP members are treated as self-employed individuals. They have to register for Self Assessment and pay Income Tax and National Insurance on their individual profits, regardless of whether they take all of the profits as a salary or leave some of it in the business. However, they are not liable for Employers’ National Insurance on their income.

Depending on the amount of profit generated, the tax liability of LLP members can be rather high. If an LLP member’s income exceeds the Personal tax-free Allowance threshold (£11,500 for 2017-18 tax year), he or she will be subject to the following Income Tax rates:

  • 20% on taxable income up to £33,500 (you will start paying this rate on income above the £11,500 Personal Allowance threshold).
  • 40% on taxable income between £33,501 – £150,000 (you will start paying this rate on income over £43,000).
  • 45% on income over £150,000.

Tax efficiency – leaving money in the business

In instances where you will make more annual profit than you need to take out of your business, a limited company will be more tax efficient. There is no need to withdraw all surplus income immediately. Instead, you could leave some of the profits in the business and defer tax by withdrawing the surplus in a future tax year.

This is not possible with an LLP. Regardless of whether the members take all of their annual profit entitlement or leave some in the business, all profit is subject to Income Tax in the financial year it is generated.

Internal structure and allocation of profits

An LLP can offer greater flexibility than a limited company in terms of altering the rights, duties and profit entitlement of individual members. Such arrangements can be agreed verbally amongst LLP members, and they can be quickly and easily changed at any time. However, it is commonplace to draw up an LLP Agreement. This document will outline the internal management structure of the business and the various arrangements in place, thus avoiding internal conflict and disputes.

The voting rights and profit entitlement of shareholders are governed by the prescribed particulars attached to their shares. In most instances, companies will issue just one type of share, thus providing equal rights and profit entitlement to all shareholders.

It is more difficult to change the rights and profit entitlement of shareholders because they are stipulated in these prescribed particulars. Most companies will draw up a shareholders’ agreement to outline their rights, responsibilities and duties, and the way in which the company should operate.

21 Comments

  1. 2 self employed people decide to work together and split all profits 50/50.
    They continue to carry out other works for themselves under their sole trader status so their personal allowances are taken up by this work.
    Would a LLP be more beneficial than a ltd company with two shareholders ? With regard to any dividends that could be taken from the Ltd company

    • Dear Stephen
      Thank you for your message. The question you have is a question for an accountant. We are not accountants so are not able to advise you in this case.
      Best regards,
      Rapid Formations Team.

  2. Hi, the blog says that the liability of LLP is limited to the amount each partner guarantees to pay if the business runs into financial difficulty or is wound up. How and where do you define and declare that amount?

    • Dear Nicholas,
      Thank you for your message. The limit of liability in an LLP will be laid out in an LLP agreement which should be agreed on by all partners.
      Best regards,
      Rapid Formations Team

  3. Can all partners in an LLP be limited companies ?

    • Hi Quinton,

      Yes, I believe it is possible to set up an LLP with all corporate members, but I would advise checking with Companies House to be absolutely certain that this is still the case – you can call them on 0303 123 4500.

      Best wishes,

      Rachel Craig

      • Hello Rachel,

        I would like to set up an immigration consulting/ overseas visa services company with my partner. There is no investment needed as we provide advisory services and visa services for different countries. What do you think will be the best option to use? LLP or limited company?

        • Dear Shah,
          Thank you for your message. The type of business you are intending run operate does not favour any particular type of entity. Most of the limited liability entities set up in the UK are limited companies and I would suggest this would be fine for your needs.
          Best regards,
          Rapid Formations Team.

  4. Hi!

    I am planning to start an architecture practice on my own. I will be working initially on small residential projects (from home) but it seems that I might get a very important project of approx £3m in the future (in about 6 months).
    What would you recommend to set up as? I believe that setting up a LLC is the way forward as I haven;t got a partner? Can you please give me some advice?

    Thank you

    • Hi Alicia,

      A limited liability company may be the best option but I would strongly advise consulting a professional adviser or accountant before making a decision – they will be able to discuss your options based on the future plans of your firm.

      Best wishes,

      Rachel Craig

  5. How does a dormant Ltd company work within an LLP? Could the Ltd company be used in the future – if so how?
    Would that be tax efficient in the future using it for distribution of dividends? (bearing in mind the additional costs in running the company!)

    Many thanks

    • Hi Angus,

      Could you clarify what you mean – are you referring to using a dormant company as an LLP member to allow you to set up an LLP as the only human partner?

      Thanks,

      Rachel

  6. I WANT TO START A MULTI BUSINESS FIRM LIKE SAHARA IN PARTNERSHIP THAT TO FUTURE PLAN IS FOR PUBLIC COMPANY.I HAVE FUND CRISIS NOW FOR OPENING A COMPANY SO WHICH ONE SHOULD I START I.E PARTNERSHIP/LLP/LLC/LIMITED/PVT LIMITED AS I WANT MY BANK ACCOUNT SHOULD BE IN ONE NAME & REST WORK SHOULD BE IN ANOTHER NAME.

    • Hi Anish,

      I’m afraid I cannot make any professional recommendations to you because I do not know the particulars of your business or future plans. I would recommend speaking to an accountant because it sounds as though you have big plans for this business venture – you will require tailored, professional advice from the outset.

      Best wishes,

      Rachel Craig

  7. If the entity (a financial services intermediary) has overseas investors, which legal status would be more appropriate and tax efficient LLP or Private Ltd Company?

    • That is one thing I wonder as well. Assuming all the shareholders are overseas residents, which of these two types you think is makes more sense?

    • Dear Sir

      Thank you for your message.

      We are not accountancy or taxation advisors so cannot give guidance on the best structure for your business and would advise that you discuss requirements of this nature with an accountant.

      Kind regards

  8. I have a limited company. My company has 2 parthners, with equal shares of 50%. My parthner has decided to leave because he cannot afford to pay the expenses of the company. my company has not started yet so what so I need to check to make sure that he has transferred everything under my name?

    • Hi Ruchika

      Thank you for your message.

      If the other director/shareholder is leaving the company they would need to resign from the company by following the appropriate procedures of informing the company first of the intention to resign and then the removal being approved. Companies House would then require to be notified of the changes.

      If the person is giving up his shares then an Annual Return should be completed and filed with Companies House to reflect the changes.

      Kind regards

  9. How do I determine the number of shares in a company being set up?



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