Understanding LLP: What is an LLP in the United Kingdom?

A Limited Liability Partnership (LLP) is a type of business structure that combines the benefits of a partnership and a limited company. In an LLP, partners have limited liability for the business’s debts and obligations, meaning their personal assets are protected. LLPs are commonly used by professionals, such as lawyers and accountants, as well as small business owners.

To form an LLP, partners must register with Companies House and provide details of their company’s structure and operations. This includes drafting a partnership agreement, selecting a registered office address, and appointing designated members to manage the business.

LLPs are a popular choice for those seeking to protect their personal assets while also maintaining the flexibility and simplicity of a partnership structure. In this article, we will explore the benefits and requirements of forming an LLP in the United Kingdom. LLPs are commonly used by professionals, such as lawyers and accountants, as well as small business owners in business services and business legal services.

Key Takeaways:

• An LLP is a business structure that combines the benefits of a partnership and a limited company.
• LLPs offer limited liability protection for partners, meaning their personal assets are safeguarded.
• LLPs require partners to register with Companies House and maintain a partnership agreement and designated members.
• LLPs are a popular choice for professionals and small business owners seeking liability protection and flexibility.
• LLPs are subject to compliance and reporting obligations, such as maintaining a registered office address and notifying Companies House of any changes.

Definition of an LLP

An LLP, or Limited Liability Partnership, is a legal entity that combines features of both a traditional partnership and a limited company. As a separate legal entity, an LLP offers limited liability protection to its partners, shielding them from the actions or debts of the LLP.

Unlike general partnerships, LLPs are registered at Companies House and must comply with the Limited Liability Partnerships Act 2000. An LLP is not a corporation, but it is a distinct legal entity and can enter into contracts, own property, and sue or be sued in its name.

Because of their flexibility and protection for partners, LLPs are often chosen by professional firms, such as law firms, accountants, and consultancies. Another advantage of an LLP is its tax transparency. Unlike a limited company, an LLP is not subject to corporation tax on its profits, and each partner is individually taxed on their share of the profits through self-assessment. Explore the tax benefits of an LLP, especially for professionals, in our commercial lawyer section

Key features of an LLP:

Formation and Registration of an LLP

Setting up an LLP requires following the correct formation and registration procedures. To begin this process, it is necessary to file the appropriate documents with the Companies House, the regulatory body responsible for the incorporation of companies and partnerships in the UK.

These documents include the incorporation form, which contains details such as the proposed LLP’s name, its registered office address, and the names and addresses of its designated members. LLPs must have at least two designated members, who have a legal obligation to ensure that the partnership complies with the relevant legal requirements.

LLPs must also have a partnership agreement, which outlines the roles and responsibilities of each designated member and the procedures for decision-making and profit distribution. This agreement is not filed with Companies House, but it is legally binding and should be kept up to date and reviewed regularly.

The registered office address is the official address of the LLP, where all formal communications will be sent. It should be a physical location in the UK, and its details must be included in all the LLP’s documents, stationery, and websites. There are different options for choosing a registered office address; for instance, the LLP may use its business address, a PO box, or a registered office address service provider.

Once the incorporation documents are filed, Companies House will review and verify them. If they are complete and accurate, the LLP will be officially registered and receive a unique registration number. The process usually takes between 24 hours and 10 days, depending on the method of registration and the complexity of the partnership’s structure.

It is worth noting that LLPs have ongoing reporting requirements to Companies House. These include filing an annual confirmation statement, which confirms the LLP’s details and members’ information, and an annual tax return, which reports the LLP’s income and expenses. Failure to comply with these obligations may result in fines, penalties, or even the dissolution of the LLP.

Benefits of an LLP

An LLP provides limited liability protection to its partners, meaning that their personal assets are safeguarded against any business debts or legal liabilities. This is a significant benefit compared to other business structures, such as a traditional partnership or sole proprietorship, where personal assets may be at risk.

Another advantage of an LLP is its tax transparency. Unlike a limited company, an LLP is not subject to corporation tax on its profits, and each partner is individually taxed on their share of the profits through self-assessment. This can result in a more tax-efficient structure for certain types of businesses.

Furthermore, an LLP offers flexibility in its internal structure, allowing partners to determine their roles, profit-sharing arrangements, and decision-making processes. This can be particularly beneficial for businesses where partners have different levels of investment or expertise.

Overall, the benefits of an LLP make it a popular choice for businesses that require liability protection, tax efficiency, and flexibility in their structure.

Comparison with Other Business Structures

When considering the structure of a company, there are several options to choose from. In addition to a Limited Liability Partnership (LLP), a general partnership, a limited partnership, and a private limited company are also common business structures in the United Kingdom. Each of these structures has its unique advantages and disadvantages, and their suitability depends on various factors such as the company’s size, industry, and goals.

General Partnership:

• A general partnership is a business structure where two or more people join together to run a business. Each partner is personally liable for the company’s debts and obligations.
• It is relatively simple and inexpensive to set up and maintain a general partnership.
• However, it does not offer the benefit of limited liability protection that an LLP provides.

Limited Partnership:

• A limited partnership consists of at least one general partner who has unlimited liability and at least one limited partner who is only liable for the amount of their investment in the company.
• It offers limited liability protection for the limited partners.
• However, it can be more complicated and expensive to set up and maintain than a general partnership.

Private Limited Company:

• A private limited company is a separate legal entity from its shareholders, which means it offers the benefit of limited liability protection.
• It can have one or more shareholders, but its shares cannot be publicly traded.
• It is suitable for small to medium-sized businesses seeking to raise capital or have multiple owners.
• However, it can be more complicated and expensive to set up and maintain than an LLP.

As the table below shows, an LLP combines the flexibility of a partnership with the protection of a limited company, making it an attractive option for many businesses.

Overall, an LLP may be the most suitable option for businesses that require flexibility in their internal structure while offering limited liability protection to their partners. However, it is important to consider all available options before deciding on the most appropriate business structure.

Operation and Governance of an LLP

Once an LLP has been formed, it must be governed and managed appropriately. The internal management structure of an LLP is typically set out in a partnership agreement, which outlines the roles and responsibilities of designated members and other partners. The agreement must be agreed upon by all partners and signed by them and also reviewed regularly to ensure it remains relevant and up to date.

Designated members

LLPs have two types of partners: designated members and regular members. Designated members are responsible for ensuring that the LLP complies with the legal requirements set out in the Limited Liability Partnerships Act 2000 and the LLP agreement. They are also accountable for maintaining accurate details of all members, including their names and addresses, at Companies House.

Designated members have specific legal obligations, such as signing the LLP’s annual accounts and ensuring that the LLP’s tax returns are filed on time. They may also be held liable if the LLP’s legal obligations are not met, although this will depend on the specific circumstances.

Regular members of the LLP may also be involved in the day-to-day management of the business, depending on the terms of the partnership agreement.

Members’ details

LLPs are required to maintain accurate details of all members, including their names and addresses, and to inform Companies House of any changes to these details. Failure to do so can result in fines and other penalties. Therefore, it is essential to keep the members’ details up to date and accurate at all times.

Partnership agreement

The partnership agreement is a crucial document that sets out the internal structure and governance of the LLP. It typically covers the following aspects:

• The rights and responsibilities of each partner
• The procedure for admitting new partners
• The procedure for resolving disputes between partners
• The distribution of profits and losses
• The process for winding up the LLP

The partnership agreement is a legally binding document, and it is essential to ensure that it is carefully considered and drafted with expert help.

Conclusion

The operation and governance of an LLP are crucial to ensuring its success. By selecting designated members responsible for ensuring compliance with legal obligations, maintaining accurate details of all members, and drafting a comprehensive partnership agreement, the LLP can operate smoothly and effectively. The partnership agreement should be reviewed regularly and updated as needed. This approach will help to protect the LLP from legal and financial risks and lay the foundation for long-term success.

Taxation of LLPs

In the United Kingdom, Limited Liability Partnerships (LLPs) are required to pay corporation tax on their profits. Corporation tax is a tax on the profits of UK companies, including LLPs. It is calculated on the profits earned during an accounting period and is payable within nine months and one day after the end of that period.

Individual partners in an LLP are generally not subject to corporation tax on their share of the profits, but they may be subject to income tax through self-assessment. This means that each partner must report their share of the LLP’s profits and losses on their personal tax return. The LLP itself does not pay income tax, but the individual partners do.

It is important to note that the LLP must register with HM Revenue and Customs for corporation tax and to obtain a Unique Taxpayer Reference (UTR). The partnership may also need to register for VAT if their taxable turnover exceeds the current threshold of £85,000 per year.

LLP Tax Returns

LLPs are required to file an annual tax return with HMRC. This tax return contains details of the partnership’s income, gains, losses, and expenses for the accounting period, as well as a statement of the partners’ profit shares. The tax return must be submitted online within 12 months after the end of the relevant accounting period.

If the LLP’s financial statements are audited or if the LLP has total assets of more than £5.1 million, the LLP must also file a tax return with Companies House. This tax return provides additional information about the LLP’s financial performance and is due within 12 months after the end of the relevant accounting period.

National Insurance Contributions (NICs)

LLP partners are also responsible for paying Class 2 NICs on their self-employed earnings, which include their share of the LLP profits. If their earnings exceed the current threshold of £6,475 per year, they must also pay Class 4 NICs.

LLP partners’ NICs are calculated on their share of the partnership’s profits and losses, less any capital allowances and deductions. The LLP must also pay Class 1A NICs on any employee benefits that it provides to its partners or employees.

Conversion to an LLP

Converting an existing business structure, such as a traditional partnership or limited company, into a limited liability partnership can provide additional benefits for the owners. It allows them to retain the partnership structure while gaining the limited liability protection offered by an LLP. Here, we will discuss the legal requirements and process of converting to an LLP.

Partnership Structure

Before converting to an LLP, the business must first be structured as a partnership with two or more individuals carrying on a business with a view to profit. If the business is currently a sole proprietorship or limited company, it must first be restructured as a partnership.

Compliance with the Partnership Act and Companies Act 2006

The Partnership Act 1890 and Companies Act 2006 provide the legal framework for converting to an LLP. The Partnership Act requires that the partnership agreement be reviewed and updated to comply with the LLP regulations. The Companies Act 2006 requires that the partnership file a resolution to register as an LLP with Companies House and submit Form LL IN01 to Companies House for registration.