Limited Liability Partnerships (LLPs)

What is a limited liability partnership (LLP)?

Combining aspects of an ordinary (general) partnership structure and a limited company, a limited liability partnership (LLP) is an incorporated business partnership that exists as a separate ‘legal person’. It is responsible for its own debts, providing limited liability protection to members (partners), yet it retains the organisational flexibility and tax position of an ordinary partnership.

How many partners are required to form an LLP?

You need at least two partners (members) to form an LLP, and there is generally no upper limited to the number of members allowed. At least two of the partners must be ‘designated members’, who assume responsibility for the statutory administrative requirements of the partnership. LLPs do not have directors.

What are the benefits of an LLP?

The key benefits of an LLP are limited liability protection for members, who are legally and financially separate from the business; flexible management structure and profit distribution options; greater professional image and credibility; and the protection of the partnership’s registered name.

What is the difference between an LLP and a limited company?

Whilst both are incorporated at Companies House, there are noteworthy differences between an LLP and a limited company:

• An LLP requires at least two individual members; companies require at least one member and one director, but one individual can fill both positions
• The internal organisational structure of an LLP is more flexible than that of a company
• The limited liability of LLP members is agreed between them; the liability of company members is limited to the par value of their shares or guarantees
• Unlike companies, LLPs cannot issue shares in exchange for investment
• LLP members receive proportional profit allocations (based on the work they do and/or their investment) and are taxed through Self Assessment; companies pay Corporation Tax on profits before issuing surplus income as taxable dividends, and directors salaries are taxed through PAYE
• LLPs are controlled and managed by members as per an LLP agreement; companies are owned and controlled by members and managed by directors, as per the articles of association and (sometimes) a shareholders’ agreement.

To find out more about the differences between the two structures, please read Limited company or LLP?

Who would form an LLP, and why?

Most LLPs are formed by professional services providers, like accountants, lawyers, architects, and dentists, who tend to work in groups and pool their resources. The LLP structure enables partners to enjoy the flexible structure and tax status of the ordinary partnership model, whilst at the same time providing ‘limited liability’ to protect their personal finances and assets.

How is an LLP taxed?

LLPs are tax transparent, like ordinary partnerships, so they do not pay Corporation Tax. Each LLP member is self-employed for tax purposes. They file personal (Self Assessment) tax returns each year and pay Income Tax and National Insurance on their share of the profits received from the LLP.

If an LLP is VAT registered, the LLP is responsible for filing VAT Returns with HMRC and paying its VAT bills.

What rights and responsibilities do partners have?

An LLP is a body corporate (an incorporated business), which means that it is a separate legal entity and provides limited liability to its partners (members). Owing to the flexible organisational structure of an LLP, members can assign rights, responsibilities, and profit distribution however they see fit, provided all members are in agreement.

These provisions are normally set out in an LLP agreement and must be in accordance with the LLP Act 2000 and all other relevant legislation.

Can another company be a partner in an LLP?

It is possible to appoint another company (a 'corporate body') as a partner (member) of an LLP. In such instances, the company would be liable to Corporation Tax on any profit received from the LLP, which can then be withdrawn from the company as dividends.

What are the legal requirements of an LLP?

The legal requirements of an LLP include:

• Incorporating (registering) with Companies House under the LLP Act 2000
• Registering a unique LLP name
• Having a minimum of two LLP members (partners) at all times
• Appointing at least two partners as ‘designated’ members
• Maintaining a registered office in the same UK jurisdiction as incorporation
• Using the LLP for commercial purposes (i.e., it cannot be a non-profit or charity)
• Meeting all statutory administrative obligations

It is the legal responsibility of designated members to ensure that the LLP meets all of these requirements.

What are the administrative requirements of an LLP?

LLPs are subject to many of the same administrative rules as limited companies. They must file annual confirmation statements and annual accounts with Companies House, register the LLP for Self Assessment, and file Partnership Tax Returns with HMRC. Some LLPs may need to register for VAT.

Each LLP member must also register for Self Assessment and file a personal tax return with HMRC each year.

What is an LLP agreement?

An LLP agreement is an optional legal contract between members of an LLP, which sets out the rights, duties, and responsibilities of each member; their relationship between each other; their investment, liability, and profit entitlement; and the rules for running the partnership.

How do I form an LLP?

To form an LLP in the UK, you need to complete an application to incorporate at Companies House. The easiest way to do this is online through Rapid Formations, using our exclusive LLP package, which costs just £29.99 (+VAT) and includes an optional LLP agreement.

Simply spend a few minutes entering the required information on the application form, then one of our specialist team members will carry out a pre-submission review (which reduces the risk of rejection) before it is sent to Companies House. Once approved (usually within 3-6 business hours), you will receive copies of your LLP documents and you can begin trading at any point.

Can one person set up an LLP?

An LLP must have at least two members (partners) on incorporation and throughout its existence, but you can set up an LLP with one person if you appoint a dormant company as the second member. Some sole traders may find this preferable to forming a limited company, because they can retain their Self Assessment tax status whilst benefiting from the limited liability protection of an LLP.

Can I set up an LLP as a charity or non-profit?

In accordance with the Limited Liability Partnerships Act 2000, an LLP must be incorporated “with a view to profit”, thus it is not possible to set up an LLP as a charity or non-profit organisation. The ‘self employed’ tax status of LLP members is simply not compatible with charitable or not-for-profit ventures, which is why it is generally recommended to set up a limited by guarantee company for such purposes.

What’s the difference between an LLP and an ordinary partnership?

The main difference between an LLP and a ordinary partnership is that an LLP is a distinct entity with a legal personality that is separate from its partners (members). This provides limited liability protection to members. An ordinary partnership, however, is not legally distinct from its partners, so all partners are equally responsible for all debts and obligations of the business.