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Four Key Differences Between a Limited Company and Limited Liability Partnership (LLP)

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When starting a business in the UK, one of the first decisions you will need to make is your company’s legal structure. Two popular options for business entities are limited companies (Ltd) and limited liability partnerships (LLP). Each structure offers advantages and disadvantages, and choosing the right one depends on various factors, including your business goals, taxation preferences, and liability concerns. This article will explore four critical differences between a limited company and an LLP in the UK to help you make an informed decision for your business.

A limited company is a separate legal entity from its company directors, owners and shareholders. Shareholders own the company by holding shares. Accordingly, they bear limited liability, meaning their personal assets are not at risk from the company’s debts and liabilities.

In the UK, limited companies are governed by the Companies Act 2006 and must register with Companies House.

An LLP is a hybrid business structure that combines elements of a traditional partnership and a limited company. An LLP structure contains two types of LLP members: 

  • designated members; and 
  • ordinary members.

Designated members have added responsibilities, such as filing annual accounts and ensuring compliance with regulations. Unlike limited companies, an LLP does not have shareholders. Instead, members have a direct stake in the partnership itself. The liability of members is limited to the amount they have invested in the business or agreed to contribute.

2. Liability 

One of the primary advantages of a limited company is limited liability. This protects shareholders’ personal assets from the company’s debts and liabilities.

In the event of financial trouble, the shareholders are only liable for the value of their shares or any unpaid amounts on those shares. This separation between personal and business assets provides a significant level of security for shareholders.

As the name suggests, an LLP also offers limited liability, but the extent of this protection is slightly different. In an LLP, members are generally not personally liable for the partnership’s debts or liabilities. However, if a member acts negligently or engages in wrongful conduct, they may still be held personally liable for their actions. This means that while an LLP provides a high degree of liability protection, it is not absolute and depends on individual member behaviour.

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3. Taxation

Limited companies in the UK are subject to corporation tax on their profits. Shareholders are subject to personal income tax on any dividends they receive from the company. The taxation of limited companies can be more complex, with various allowances, deductions and reliefs available depending on the company’s size and activities.

LLPs are not subject to corporation tax but are treated as “tax-transparent” entities. This means that the profits and losses of the LLP are passed through to the individual members, and each member is responsible for reporting their share of the LLP’s income on their personal tax returns.

This can simplify the taxation process, as members are taxed directly on their earnings. Still, it may not always result in lower overall tax liability, as personal tax rates can vary.

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4. Administration and Reporting Requirements

Limited companies in the UK are subject to various reporting and administrative requirements. These include filing annual financial statements, annual returns, and other documents with Companies House. Larger companies may also need to undergo annual audits. Directors of limited companies have specific legal duties and responsibilities, and failure to meet these obligations can lead to personal liability.

LLPs also have reporting and administrative requirements, but they are generally less burdensome than those of limited companies. Designated members are responsible for ensuring compliance with these obligations, including filing annual accounts and an annual confirmation statement with Companies House. LLPs are not required to undergo audits unless they meet certain criteria, such as exceeding specified turnover or asset thresholds.

Key Takeaways

Choosing between a limited company and a limited liability partnership (LLP) in the UK is crucial for any business owner. Ultimately, the choice should align with your business goals, the level of liability protection you need, and your tax preferences.

Before making a decision, it is advisable to consult with an expert legal who can provide personalised guidance on the main differences between the two based on your specific circumstances and needs.

If you need legal assistance choosing between a limited company or an LLP our experienced business structure lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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