Limited Company vs. Limited Liability Partnership (LLP)

Choosing the proper business structure is very confusing when you are looking to form a company in the UK as a non-resident. There are advantages and drawbacks to every business structure. What works for others might not work for your goal.

For example, if you are preparing to start your business with someone else or multiple people but want to take on less personal liability, then there are two options you may consider:

1. Limited company.
2. Limited Liability Partnership.

Understanding the distinctions between a limited company and an LLP is crucial. This choice can significantly impact your business operations, tax obligations, and personal liability.

Let us break down the complexities of today’s topic, “limited company vs. Limited Liability Partnership (LLP).” Let’s guide you in choosing the best business structure for your entrepreneurial dream.

What Is a Limited Company in the UK?

Let’s begin with the basics: Limited Company in the UK.

In the UK, a limited company is a business structure where the company is a separate legal entity from its owners. The liability of the shareholders is limited to the capital they originally invested, meaning personal assets are generally protected in the event of business debts or legal action.

This structure is known for providing a professional image, enabling more accessible access to capital, and offering potential tax benefits. Limited companies must register with Companies House and comply with various reporting and tax obligations.

Examples of Limited Companies

Following the definition of a limited company in the UK as a separate legal entity with limited liability for its shareholders, there are two main types of limited companies–

1. Private limited company (Ltd),
2. Public limited company (PLC).

Here are some examples that highlight the diversity within these two categories:

Public Limited Companies (PLCs):

• Unilever PLC.
• HSBC Holdings PLC.
• AstraZeneca PLC.
• Vodafone Group PLC.
• BP PLC.

Private Limited Companies (Ltd):

• JCB Ltd
• Virgin Atlantic Ltd
• John Lewis Partnership Ltd
• Dyson Ltd
• Clarks Ltd

Advantages of a Limited Company

The key advantages of limited companies in the UK, which include both public limited companies (PLCs) and private limited companies (Ltd), are as follows:

• Limited Liability: Shareholders have limited liability, meaning their personal assets are protected in case of business failure. Their liability is limited to the nominal amount of their investment in the company.
  
  
• Professional Image: Limited companies often convey a more professional image, which can be beneficial in gaining the trust of customers, suppliers, and investors.
  
  
• Access to Capital: Especially for PLCs, there is more tremendous potential for raising capital by selling shares. Private limited companies can also attract investors, though on a smaller scale.
  
  
• Tax Efficiency: Limited companies may benefit from more favorable tax treatment. They pay corporation tax—through a CT600 Form—on their profits.
  
  
• Separate Legal Entity: A limited company is its own legal entity. This means it can enter into contracts, own property, and be involved in legal proceedings independently of its shareholders.
  
  
• Continuity and Transferability: Limited companies enjoy continuity because changes in shareholders or directors do not affect the company’s existence. The ability to transfer or sell shares provides ownership with flexibility.
  
  These advantages make limited companies a popular choice for business activities in the UK, offering protection, credibility, and financial opportunities.

Disadvantages of a Limited Company

While there are many good reasons to start a limited company in the UK, there are also some disadvantages that you should think about. As with both public limited companies (PLCs) and private limited companies (Ltd), there are the following significant disadvantages associated with establishing and operating a limited company:

• Complexity in Formation and Reporting: Setting up a limited company involves more paperwork and formal procedures than other business structures, like sole traders. Ongoing reporting requirements, such as filing annual accounts, confirmation statements, and tax returns, can be more complex and time-consuming.
  
  
• Public Disclosure: Limited companies must make certain information publicly available, including financial statements and details of directors. This lack of privacy can be a concern for some business owners.
  
  
• Taxation and Financial Regulations: Limited companies are subject to corporation tax (CT600 Form) on their profits, which might sometimes be higher than personal tax rates. They also face stricter financial regulations and compliance standards.
  
  
• Administrative Burden: Running a limited company involves ongoing administrative responsibilities, such as maintaining company records, holding annual meetings, and ensuring compliance with various legal and regulatory requirements.
  
  
• Director Responsibilities: Directors of limited companies have specific legal responsibilities. Failure to meet these can result in penalties or personal liability, mainly if misconduct or negligence is involved.
  
  
• Difficulty in Withdrawing Profits: Extracting money from a limited company can be less straightforward than in other business structures. Dividends, salaries, and bonuses all have different tax implications, and taking out money inappropriately can lead to tax inefficiencies.
  
  These disadvantages highlight the need for careful consideration and often professional advice when deciding whether to operate as a limited company in the UK.

What Is a Limited Liability Partnership in the UK?

In the UK, a Limited Liability Partnership (LLP) is a business structure that combines elements of partnerships and limited companies. In an LLP, each partner’s liability is limited to the amount they invest in the business. This means the partners’ personal assets are generally protected if the business faces financial difficulties.

An LLP is a separate legal entity, which means it can enter into contracts, own property, and be subject to legal action independently of its partners. Members or partners have more direct control over the business and its profits.

LLPs must register with Companies House and adhere to specific reporting and disclosure requirements, similar to limited companies. However, unlike limited companies, the profits of LLPs are distributed directly to the partners, who are then taxed individually, akin to the structure of a traditional partnership.

Examples of LLP

Professional services firms often choose an LLP, or limited liability partnership, because it allows for a flexible management structure while providing limited liability protection. This structure is ideal for professional service providers like law, accounting, architects, and consulting firms who want to collaborate while protecting personal assets.

Various professional firms and businesses in the UK operate as Limited Liability Partnerships (LLPs). Such as:

• Ernst & Young LLP
• Deloitte LLP
• Knight Frank LLP
• Slaughter and May LLP
• Foster + Partners Group LLP
• Clifford Chance LLP.

Advantages of LLP

The key advantages of a Limited Liability Partnership (LLP) in the UK are:

Limited Liability Protection: Partners in an LLP are protected from personal liability for business debts; their personal assets are generally secure.

• Flexible Management Structure: LLPs offer a flexible management structure where partners can manage the business as they agree.
  
  
• Reduced Public Disclosure Requirements: Compared to public limited companies, LLPs have fewer requirements for public disclosure, offering greater privacy while maintaining transparency.
  
  
• Tax Benefits: Income is typically distributed to partners who pay income tax and national insurance, allowing for more favorable tax treatment than a traditional corporation.
  
  
• Separate Legal Entity: An LLP is a separate legal entity, which means it can enter into contracts, own property, and be subject to legal actions independently of its partners.
  
  
• No Requirement for Share Capital: Unlike limited companies, LLPs do not require share capital, making setting up and operating in certain respects more straightforward.
  
  
• Ease of Adding or Changing Partners: It’s relatively easy to add new partners or change existing partnership arrangements in an LLP, providing flexibility as the business grows or changes.
  
  
• Simplicity in Profit Distribution: Profits can be easily distributed among partners according to the terms of the LLP agreement without the more complex rules that apply to dividend distributions in limited companies.
  
  
• Professional Appearance: LLPs frequently used by professional firms can project a more formal and established image than a general partnership or sole trader.
  
  
  These advantages make LLPs an attractive option for many businesses, especially those in professional services where a partnership model is preferred but limited liability is also desirable.

Disadvantages of LLP

Building on exploring the advantages of Limited Liability Partnerships (LLPs) in the UK, it’s equally important to consider the potential drawbacks. While LLPs offer benefits like limited liability protection and flexible management, they also come with certain disadvantages that can impact their suitability for your business:

• Shared Responsibility: In an LLP, all partners share responsibility for business decisions and debts incurred by other partners during business, which can pose risks if not managed properly.
  
  
• Taxation on Profit: Regardless of whether profits are withdrawn from the business, partners must pay income tax on their share of the profits, which can be a disadvantage compared to retained earnings in limited companies.
  
  
• Limited External Investment Opportunities: Unlike limited companies, LLPs in the UK cannot issue shares to raise capital. This can limit external investment and growth, especially compared to limited companies that can easily attract investors through share offerings.
  
  
• Complex Profit Sharing: Profit sharing in LLPs can be complex, as it must be defined in the partnership agreement, and any changes to this arrangement require consent from all partners.
  
  
• Limited Privacy: While there’s less disclosure than for PLCs, the requirement to register with Companies House and disclose specific details can be seen as a disadvantage for those seeking complete privacy.
  
  
• No Corporate Tax Advantages: As LLPs don’t have to pay corporate tax, they do not benefit from corporate tax advantages that limited companies enjoy, such as lower corporation tax rates and tax-efficient ways to extract profits.
  
  These disadvantages highlight the need for careful consideration and planning when choosing an LLP as the business structure, particularly regarding management, financial transparency, and growth potential. That’s the advantages and disadvantages of LLP.

Distinctions Between a Limited Liability Partnership and a Limited Company

Continuing our exploration of UK business structures, after delving into the nature, examples, and pros and cons of limited companies and limited liability partnerships (LLPs), it’s essential to compare these two forms directly.
Let’s delve into the main topic of today: Limited company vs. limited liability partnership (LLP).

Ownership and Governance

• LLP: Members own the LLP through “memberships,” not shares. Governance is typically more flexible and collaborative, with decisions made through consensus or voting based on agreed-upon contributions.
  
  
• Private Limited Company: In a private limited company, ownership is divided into shares. Shareholders elect directors who manage the company. Decision-making is hierarchical, with more power vested in directors and shareholders with more significant holdings.
  
  
• Public Limited Company: Shares are publicly traded, allowing anyone to invest in the company. This can lead to a broader pool of capital and increased scrutiny and pressure from shareholders.

Liability

• LLP: Members’ liability is limited to their agreed-upon contributions. This means they can lose their investment, but personal assets are generally protected.
  
  
• Limited Company: Shareholders’ liability is limited to the value of their shares, whether public or private. Losses are restricted to the initial investment.

Taxation

• LLP: Profits are allocated to members and taxed as income based on their individual tax bands.
  
  
• Limited Company: The company pays corporation tax on its earnings.

Raising Capital

• LLP: Issuing shares is not possible. Loans, admitting new members, or joint ventures are common avenues.
  
  
• Limited Company (Private and Public): Both limited companies can raise capital by selling shares, whether they’re private or public. However, private limited companies are limited to a specific group.

Compliance and Administration

• LLP: LLP must register with Companies House and file annual accounts, but the reporting requirements are generally less stringent than those of limited companies.
  
  
• Limited Company (Private and Public): Private limited companies and PLCs face stricter regulatory and reporting requirements, including annual accounts, confirmation statements, and more comprehensive disclosures.

Continuity and Succession

• LLP: Businesses can face challenges in continuity when partners leave or join, though less so than traditional partnerships.
  
  
• Limited Company (Private and Public): Offers more continuity; ownership can be transferred through the sale of shares, especially in public limited companies where shares are traded on a stock exchange.

Reporting and Disclosure

• LLP: A limited liability partnership must file accounts and annual Confirmation statements with Companies House, but it has fewer disclosure requirements than a public limited company.
  
  
• Limited Company: Both private and public limited companies must file detailed financial reports and annual returns. Public companies have additional disclosure and compliance requirements due to their public nature.

Other Differences

• Transferability of Ownership: LLP members are generally less readily transferable than shares in a limited company.
  
  
• Profit Distribution: LLPs have more flexibility in profit-sharing arrangements, while limited companies often follow dividend policies based on shareholdings.
  
  
• Exit Strategies: Selling shares in a limited company is typically easier than exiting an LLP membership, which may involve negotiation and agreement with other members.

Comparison Table of Limited Company and Limited Liability Partnership (LLP)

A detailed comparison table showcases limited company vs. limited liability partnership (LLP) in the UK below:

This table briefly summarises the main operational and structural differences between a limited company and a limited liability partnership (LLP). It discusses ownership, liability, taxes, raising money, compliance, continuity, and reporting of two business structures.

Similarities Between Limited Company and LLP

We explored everything about limited company vs. limited liability partnership. Now, let’s talk about the common characteristics between them.
If you are considering starting a business in the UK, knowing what limited companies and limited liability partnerships (LLPs) have in common is essential. Despite their unique features and operational differences, these two famous business structures have several vital similarities that might influence your decision.

Here are some critical similarities:

• Limited Liability Protection: Both structures offer limited liability to their members or shareholders, meaning personal assets are generally protected in case of business failure.
  
  
• Separate Legal Entity: LLPs and limited companies are separate legal entities from their members or shareholders. This means they can enter into contracts, own property, and be liable for debts independently of their owners.
  
  
• Registration and Reporting Requirements: Both need to be registered with Companies House and are required to file certain documents annually, such as annual accounts and confirmation statements. They must also go through company renewals.
  
  
• Registered Office: Another significant similarity between the two companies is having a registered office address in the UK. It is LLPs and limited companies’ official correspondence and legal communications address.
  
  
• Professional Image: Both structures are often perceived as more professional or credible than sole traders, which can be beneficial in building trust with clients, suppliers, and investors.
  
  
• Tax Obligations: While their tax liabilities differ, LLPs and limited companies are subject to tax obligations and must adhere to UK tax regulations.
  
  
• Continuity: Both structures offer business continuity despite changes in management or ownership. For LLPs, this is subject to the terms of the LLP agreement, while for limited companies, it’s due to the transferability of shares.
  
  
• Governance Flexibility: LLPs and limited companies have a degree of flexibility in their governance structures, typically more pronounced in LLPs.
  
  
• Public Disclosure: Both are required to make certain information public through filings with Companies House, including financial statements and details of owners or directors.
  
  Understanding these similarities can help decide whether an LLP or a limited company is the proper structure for a business, as it highlights the expected benefits and obligations they share.

Should I Form a Limited Company or LLP?

As we navigate limited company vs. limited liability partnership, a question may arise in your mind: limited company or limited liability partnership, which one should I choose?

Whether to set up a limited company or a limited liability partnership (LLP) in the UK depends on various factors specific to your business goals, needs, and circumstances.

Here are some considerations you may think about when making your decision, along with the advantages and disadvantages of each business structure, including differences and similarities:

Nature of Your Business

If you’re in a professional service industry like law or accounting, an LLP might be more suitable due to its flexible structure and partnership model.
A limited company could be more advantageous for businesses seeking to raise capital through equity, issue shares, or eventually go public.

Liability and Risk

Both structures offer limited liability protection, but how this is applied differs. Consider how much personal financial risk you’re willing to take.

Tax Considerations

In an LLP, profits are taxed as members’ personal income, which might benefit small to medium-sized enterprises.
Limited Companies pay corporation tax on profits, and shareholders are taxed on dividends, which could be more tax-efficient for higher profits.

Control and Management Structure

• LLPs often offer more management and profit distribution flexibility.
  
  
• Limited companies have a more defined structure with directors and potentially more formal governance.

Future Growth and Investment

• A limited company might provide more straightforward options if you seek external investment or sell the business.
  
  
• An LLP can be more suitable for maintaining control and flexibility in decision-making.

Future Plans

Consider your long-term business goals, including expansion, exit strategies, and potential sale or transfer of the business. Each structure offers different advantages in these areas.

Administrative and Compliance Requirements

Consider the different levels of administrative tasks, reporting, and compliance requirements. Limited companies generally have more stringent requirements.

Public Perception and Professional Image

A limited company may provide a perception of being a more established or larger entity, which can be necessary in some industries.

Exit Strategy

Selling or transferring ownership can be more straightforward in a limited company by selling shares.

Ultimately, the decision should be based on thoroughly evaluating your business’s needs, growth plans, industry requirements, and tax implications. It’s often beneficial to consult with legal and financial advisors to understand the implications and make an informed choice.

Tax Benefits of Switching From LLP to a Limited Company

If you are operating a limited liability partnership and planning to switch the company structures, a limited company is undoubtedly a wise choice. Switching from an LLP to a limited company in the UK could offer tax advantages like:

• Corporation Tax Rates: Limited companies are taxed under corporation tax, which might be lower than the income tax rates that apply to individual members of an LLP.
  
  
• Dividend Tax Planning: Shareholders of limited companies can receive dividends taxed differently from salaries. Dividend tax rates are separate from income tax rates and can be more favorable, especially for higher earners.
  
  
• Profit Retention and Growth: Limited companies can retain profits for reinvestment and growth without subjecting them to individual income tax. This can accelerate business expansion and increase long-term financial stability.
  
  
• Pension Contributions: Limited companies can set up pension plans for their workers that let them make contributions that are tax-deductible and could even give them tax breaks. This can enhance employee benefits and attract top talent.
  
  
• Capital Gains Tax Implications: Converting from an LLP to a limited company can affect capital gains tax (CGT). Seek professional advice to understand the CGT implications and potential tax-efficient strategies.
  
  However, tax considerations should be part of a broader evaluation, including legal and operational factors. It’s crucial to consult with a tax professional to understand the full implications and ensure the decision aligns with your overall business strategy.

FAQs

Q1: Do private limited companies require multiple shareholders?

Answer: No, private limited companies in the UK can have a single shareholder, making it possible for a single individual to own and operate such a company.

Q2: Which is better for raising capital, a limited company or an LLP?

Answer: Limited companies, particularly public limited companies (PLCs), are generally better suited for raising capital. They can issue shares to a wide range of investors, including the public, while LLPs do not have this capability.

Q3: Which structure offers better personal asset protection, a limited company or an LLP?

Answer: Limited companies and LLPs offer limited liability protection, meaning personal assets are generally protected from business debts and liabilities. The level of protection is similar in both structures.

Q4: Are LLPs and limited companies subject to different reporting requirements?

Answer: Yes, LLPs and limited companies have different reporting requirements. Limited companies, especially PLCs, face stricter regulatory and reporting obligations, including more comprehensive disclosures, than LLPs.

Q5: What is the difference between a limited company and an LLP regarding ownership and governance?

Answer: In a limited company, ownership is through shares, and directors manage the company hierarchically. In an LLP, ownership is through memberships, and governance is more flexible, with decisions often made through consensus or voting based on contributions.

Final Words…

We are at the end of our blog. At this point, we hope you understand everything about “limited company vs. limited liability partnership.”
Remember that limited companies offer a professional image and access to capital, while LLPs provide flexibility and limited liability protection. Each structure has its advantages and disadvantages. It may offer tax benefits if you’re considering switching from an LLP to a limited company.
You can consult our legal experts to make the best decision for your business.