A Limited Liability Partnership (LLP) is similar to an ordinary partnership – i.e. it comprises a number of individuals or limited companies that share in the risks, costs, responsibilities and profits of the business – but an LLP limits the burden on individual partners in relation to business liabilities. Members of an LLP are not individually responsible for the debts of the business as a whole. The liability of each member is limited to the amount of money they have invested in the business and the value of any personal guarantees they have given in order to raise finance.
As with ordinary partnerships, an LLP must only be used for businesses that are intended to make a profit. Members usually remain self-employed, pay tax on the profits they receive and are responsible for their own National Insurance Contributions.
There must be at least two members in an LLP. There is no maximum limit to the number of members. A minimum of two members must be ‘designated members’, who have additional legal obligations such as various reporting responsibilities and filing accounts with Companies House. If no members are specified as designated members on incorporation, all members will be deemed to be designated members. Members can be individuals or limited companies, although limited companies will be liable to pay Corporation Tax on their share of the LLP’s profits. LLPs are not of themselves subject to Corporation Tax.
Advantages of an LLP
Aside from protecting the personal assets of members through limited liability, an LLP allows members to organise the internal structure of the business in the same way as an ordinary partnership. LLPs are commonly used for partnerships in which members may be at risk in the event of another member’s negligence or mistake, such as firms of surveyors, solicitors and accountants. It is possible to buy and sell property in the name of the LLP.
Disadvantages of an LLP
When incorporating an LLP, similar obligations arise to those that apply to the incorporation of a limited company. It is necessary to register an LLP in England and Wales with Companies House. A set of accounts and an annual return must be sent to Companies House each year, and HM Revenue and Customs (HMRC) must be sent an annual tax return. In addition, the full name of the LLP must be displayed on stationery and outside all its offices and the address of its registered office, registered number and place of registration (e.g. England and Wales) must be included on all the LLP’s order forms, letters and on electronic communications such as emails, faxes and its website.
One member of the LLP should be nominated as being responsible for completing the Partnership Tax Return and accompanying Partnership Statement, which shows how profits or losses have been apportioned amongst the members. Although this nominated member is responsible for producing this information and filing it with HMRC, all members are liable for any mistakes or fines for incorrect or late filing.
Although it is not a legal requirement of incorporation, it is highly advisable to have in place an LLP Agreement that sets out the rights and obligations of each member. In the absence of a partnership agreement, the provisions of the Limited Liability Partnerships Act 2000 will apply, but this does not address many of the issues that arise in the management of an LLP and could in fact conflict with the way in which you and the other members wish to run the partnership.
A partnership agreement typically covers how much capital each member puts into the business, the way that profits and losses are to be apportioned, whether any partners take a salary, working arrangements such as minimum hours, the attribution of tasks, how key decisions are made and how many partners are required to make them, and what happens when a partner joins, leaves or dies.
Contact us if you would like to discuss whether an LLP is the right legal structure for your business.