The limited liability partnership was introduced on 6 April 2001 by the Limited Liability Partnerships Act 2000. LLPs must also comply with various regulations, such as the Limited Liability Partnership Regulations 2001 and the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. These regulations modify and apply parts of the Insolvency Act 1986 and the Companies Act 2006 to be relevant for LLPs.
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While partnership law does not strictly apply to a limited liability partnership, the Limited Liability Partnerships Act 2000 includes various provisions which have their origins in the Partnership Act 1890.
LLPs are often used by professional firms like accountants, solicitors, architects and medical practitioners who either cannot operate as a limited company because of restrictions imposed by their professional associations or want to benefit from the specific advantages of LLP status. Many of these businesses would in the past have operated as traditional partnerships, but an increasing proportion are now set up as limited liability partnerships and many existing partnerships have refashioned their business in the LLP structure.
Professional firms are not the only businesses who can use the limited liability partnership structure.
Professional firms are not the only businesses who can use the limited liability partnership structure. Many other businesses, including a lot of family firms, are set up as LLPs and the model is also often used as a tax-efficient investment vehicle.
The main restriction on the formation of LLPs is that they can only be used for businesses that intend to make a profit. That means it’s not possible to establish a limited liability partnership for non-profit, philanthropic or charitable purposes. Such bodies will need to continue to utilise other forms, such as unincorporated associations, companies limited by guarantee or the Charitable Incorporated Organisation (CIO).
Governed as it is by specific legislation, a limited liability partnership is neither a partnership nor a company, but combines features of each. Like a company, an LLP:
- Is a legal entity separate from its members,
- Is created via incorporation at Companies House and must nominate a registered office address at which official documents can be served upon the LLP
- Has unlimited legal capacity, meaning it can carry out any lawful act
- Can enter into commericlal contracts, hold property in its own name and offer fixed or floating charges over its assets as security for loans.
- Is liable for its own debts, can sue and be sued
- Must maintain statutory registers, for example a register of LLP members and PSC register
- Must file accounts, a confirmation statement and other event-based filings with Companies House, which can then be viewed by the public
- Exists until it is formally terminated via dissolution or a similar process
A limited liability partnership does not have shares or shareholders, but instead has members. Further distinguishing an LLP from a limited company, there are no directors: like partners in a traditional partnership, the members assume the dual responsibility of ownership and management of the business. An LLP must have at least two members, who can be either individuals or corporate entities. While there must therefore be at least two members on incorporation, it’s possible for someone to form an LLP on their own if a dormant company is appointed as a corporate member alongside them. In legislation, there’s no maximum number of LLP members.
at least two of its members need to be identified as ‘designated members’
An LLP cannot appoint a company secretary, although at least two of its members need to be identified as ‘designated members’. It’s typically these members who will take particular responsibility for ongoing compliance, statutory record-keeping, and making required submissions to Companies House.
The key advantage that an LLP provides over a traditional partnership, a feature which is also shared by limited companies, is that of limited liability of the members. Ordinarily, each member is only liable to the extent of the amount of capital they have contributed to the LLP, so individual members will not usually be liable for business debts or liability claims against the business. That means the members’ personal assets won’t be at risk, unless they’re guilty of wrongdoing or have provided personal guarantees.
In other ways, a limited liability partnership is more similar to a traditional partnership:
A flexible management structure
An LLP does not require articles of association and does not need to hold board meetings, general meetings or make decisions via resolution. The members of a limited liability partnership can determine their own preferred decision-making arrangements and other internal rules, which can also remain private between them. These arrangements are often codified in a limited liability partnership agreement, although the members will usually build in an element of flexibility to change these rules if they want to do so.
Flexible profit arrangements
LLPs have the flexibility to vary the distribution of profits between individual members, so a different percentage of profits could be paid to different members in different years. This compares with the position for companies limited by shares, where all shares of the same share class must have a dividend declared at the same level per share.
While the profit sharing arrangements for an LLP can be agreed verbally, again it’s commonplace to document the scope of flexibility in a confidential LLP agreement.
Whereas limited companies pay corporation tax and capital gains tax on their taxable income, a limited liability partnership itself has no such tax liability. Instead, the LLP’s members are taxed like partners in a traditional partnership, personally paying income tax, National Insurance and capital gains tax on their own share of profits.
Typically the members will need to register with HMRC individually as self-employed and then complete a self assessment tax return on an annual basis, paying any tax by the appropriate due dates. The LLP itself will also file a partnership tax return, showing income and expenditure as well as detailing how profits and losses have been allocated between the members.
If the limited liability partnership employs people, you’ll need to operate a Pay As You Earn (PAYE) payroll scheme, make regular returns and pay income tax and National Insurance to HMRC that are deducted from the pay of employees.
If the LLP needs to register for VAT (or chooses to register voluntarily), you’ll also need to submit regular VAT returns and make payments of VAT to HMRC.
If you’re interested in comparing different business structures, you should also investigate the features of a sole trader, limited partnership, private company limited by shares, company limited by guarantee and public limited company. If you’re unsure about what model will be best for your business, make sure you seek appropriate advice from your accountant or solicitor.
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