Limited Company vs. Partnership in the UK: Choose the Better One

Understand Limited Company vs. Partnership in the UK. Learn legal distinctions, tax responsibilities, and liability differences with this ultimate guideline.
Ltd vs Partnership in the uk

Table of Content

When starting a business in the UK, choosing the proper structure is crucial for success as an entrepreneur! The decision between a limited company and a partnership involves understanding their unique legal frameworks, tax obligations, and liability implications.

The details of “Limited Company vs. Partnership in the UK” will be carefully examined in this blog to help you make a more informed business decision.

What Is a Limited Company in the UK?

A limited company is one of the most prevalent business structures in the UK. This is a legal and separate business structure from its shareholders, owners, and directors. The owners are called shareholders; those who run it are known as directors.

It is characterized by limited liability, meaning shareholders’ personal assets are generally protected from the company’s debts and liabilities, except in specific circumstances.

Types of Limited Companies

There are two primary types of limited companies in the UK:

  1. Private Limited Company (Ltd.): A private limited company is a common business structure in the UK. It is a legal entity distinct from its owners (shareholders). Shareholders have limited liability, meaning that their personal assets are safe in case of business debts or legal issues. Private limited companies are suitable for small to medium-sized businesses.

  2. Public Limited Company (PLC): A public limited company (PLC) is typically a more significant business entity that can offer its shares to the public and is listed on stock exchanges.

Similar to private limited companies limited by shares, but with stricter regulations and reporting requirements. They must have a minimum of two shareholders and two directors, and their shares can be traded on public stock exchanges.

There are some significant examples of limited companies:

  • Arcadia Group Ltd.
  • Dyson Ltd.
  • Innocent Drinks Ltd.
  • Joseph Cyril Bamford Ltd.
  • Unilever PLC, Vodafone Group PLC.
  • Tesco PLC.
  • Jaguar Land Rover Automotive PLC.
  • B&M Retail.
  • And Monzo Bank Ltd.
Types of Limited Companies.

Key Features of a Limited Company

Continuing our exploration of business structures in the UK, let’s delve into the key features that define a limited company. Understanding these features is crucial for entrepreneurs and business owners considering this structure for their ventures.

Here are the key features of a limited company in the UK:

  • Separate Legal Entity: A limited company is a separate legal entity from its owners (shareholders). This separation shields shareholders from liability. Their personal assets are typically safeguarded if the business faces debts or legal issues.

  • Limited Liability: The liability of shareholders is restricted to the extent of their investment in the company. This limits their personal financial exposure if the company faces financial difficulties or legal claims.

  • Perpetual Existence: A limited company has a perpetual existence, meaning it can continue to operate even if shareholders change or pass away. This offers stability and continuity for the business.

  • Transfer of Ownership: Shares in a limited company can be bought, sold, or transferred, allowing for the easy transfer of ownership. This flexibility is essential for raising capital and business succession planning.

  • Access to Capital: Limited companies have various options for raising capital, including issuing shares, taking loans, and attracting investors. This makes it easier to finance business growth and expansion.

  • Tax Efficiency: Limited Companies are subject to corporate tax on their profits and sometimes VAT. This tax rate may be lower than personal income tax rates, providing potential tax advantages. Additionally, there are opportunities for tax planning and deductions.

  • Separate Finances: Limited companies maintain separate financial records from their shareholders. This separation is crucial for transparency and legal compliance.

  • Professional Image: Having “Ltd” at the end of the company name can convey a professional and established image, which can be beneficial when dealing with clients, customers, and suppliers.

  • Compliance and Reporting: Limited companies must adhere to specific compliance and reporting obligations, including filing annual statements—annual accounts and confirmation statements—and maintaining corporate records.

  • Credibility and Trust: Being a registered limited company can enhance credibility and trust in the eyes of customers, suppliers, and investors.

  • Ownership Control: Shareholders have voting rights that allow them to control the company’s direction and decision-making, proportional to their shareholdings.

  • Share Capital: Limited companies issue shares representing ownership in the company. The structure of share capital can vary, including issuing ordinary shares, preference shares, or other types.

  • Private vs. Public: Limited companies can be private (Ltd) or public (PLC). Private limited companies have restrictions on share transfers and cannot offer shares to the public. Public limited companies can offer shares to the public and are listed on stock exchanges.

These key features make limited companies attractive for entrepreneurs and business owners looking to establish a formal and structured business entity in the UK. However, it’s essential to understand this business structure’s responsibilities and legal obligations.

What Is Partnership Business in the UK?

A partnership business in the UK is a business structure where two or more individuals or entities collaborate to own and operate a business. Shared ownership, management responsibilities, and the sharing of profits and losses define it. All partners typically participate in the management of the business and share the responsibilities of running it.

This type of business can be formed quickly, often with a simple agreement between the partners. Profits and losses are divided among the partners according to the agreed-upon terms, usually detailed in that agreement.

Types of Partnership

In the UK, businesses can adopt several types of partnership structures, each with its own features and legal implications. The main types are:

  1. General Partnership: In a general partnership, all partners share equal responsibility for managing the business and are jointly liable for any debts and obligations incurred. Each partner is personally liable for the business’s debts, which means personal assets could be at risk. Profits are shared among partners and taxed as personal income.

  2. Limited Partnership: This type of partnership includes at least one ‘general’ partner with unlimited liability and one ‘limited’ partner whose liability is limited to the extent of their investment in the business.

    The general partner(s) manage the business and are personally liable for debts, while limited partners usually don’t participate in management and have limited liability.

  3. Limited Liability Partnership (LLP): Limited Liability Partnerships, or LLPs, combine the features of partnerships and corporations—a famous business structure in the US. Partners have the flexibility to operate as a partnership while enjoying limited liability. Partners in an LLP are not personally liable for debts incurred by the business or the wrongful acts of other partners. But LLPs must be registered with Companies House.

In the UK, various businesses operate as partnerships, especially in professional services such as law, accountancy, and consultancy. Here are some examples:

  • Clifford Chance.
  • Slaughter and May.
  • Foster + Partner.
  • Deloitte LLP.
  • Allen & Overy LLP.

Alongside these:

  • Doctors, dentists, and other healthcare professionals often form partnerships to offer medical services.

  • Various veterinary clinics across the UK are set up as partnerships.

  • Several solicitors and barristers in the UK operate their legal practices as partnerships, particularly in smaller or specialized firms.

Key Features of Partnership

Integrating with the previous discussion on types of partnerships, the key features of a partnership in the UK are discussed here. The characteristics that apply across various forms, such as general partnerships, limited partnerships, and limited liability partnerships (LLPs), include:

  • Joint Ownership and Management: Two or more people—known as partners—co-own and manage the company. Each partner contributes to the business regarding capital, skills, labor, or property.

  • Profit and Loss Sharing: Profits and losses are divided among the partners according to a predetermined ratio, often detailed in a partnership agreement.

  • Personal Liability: In a general partnership, each partner is liable for the business’s debts and obligations, meaning personal assets could be at risk.

  • Limited Liability Structures: In structures like LLPs or limited partnerships, the liability of some or all partners can be limited, offering protection for personal assets from the partnership’s debts.

  • Decision-Making: Decision-making is generally a joint endeavor among the partners, with the partnership agreement often outlining the decision-making process.

  • Legal Entity Status: While standard partnerships are not separate legal entities from the partners, Scottish partnerships and LLPs can be.

  • Taxation: The partnership itself is not taxed on profits. Instead, each partner pays tax on their individual share of the profits.

  • Partnership Agreement: A written agreement, while not mandatory, is advisable to formalize the terms of the partnership.

  • Flexibility: Partnerships are more flexible in management and operation than corporations.

  • Registration Requirements: General partnerships do not require registration with Companies House, but limited partnerships and LLPs do.

  • Duration and Dissolution: Partnerships can be established for a specific duration or project or indefinitely. They can also be dissolved relatively easily, per the partnership agreement’s terms.

These features underpin the functionality and appeal of partnerships in the UK, making them a viable option for various business ventures, especially in small to medium-sized enterprises and professional fields.

Distinctions between a Limited Company and a Partnership

When deciding whether to operate as a limited company or partnership in the UK, it’s essential to understand the key differences between these two business structures:

Legal Status

  • Limited Company: A limited company is a legal entity separate from its owners. This means the company can own property, incur debts, and be liable for its actions separately from its shareholders and directors.

  • Partnership: In a general partnership, the business is not a separate legal entity from the partners. However, a Limited Liability Partnership (LLP) is a separate legal entity, much like a limited company.

Liability

  • Limited Company: Shareholders’ liability is limited to their investment in the company’s shares. Personal assets are generally protected if the company incurs debts or takes legal action.

  • Partnership: Partners generally have unlimited personal liability for business debts. LLPs’ liability is limited to the amount each partner invested in the business.

Taxation

  • Limited Company: Subject to corporation tax on its profits. Dividends paid to shareholders are subject to personal income taxation as well.

  • Partnership: A partnership is not taxed as a separate entity. Instead, each partner pays tax on their share of the profits, as per their personal income tax rate.

Ownership and Management

  • Limited Company: Directors manage the company, but shareholders own it. The shareholders and directors can be different individuals.

  • Partnership: Partners are typically involved in the business’s ownership and day-to-day management.

Formation and Registration

  • Limited Company: A limited company requires registration with Companies House, a memorandum of association, and articles of association.

  • Partnership: General partnerships do not require formal registration with Companies House (except in Scotland), but LLPs do.

Transfer of Ownership

  • Limited Company: Shares can be sold or transferred more efficiently, allowing for changes in ownership without affecting operations.

  • Partnership: The transfer of ownership rights often requires the consent of all partners and can be more complex.

Disclosure and Compliance Requirements

  • Limited Company: Subject to more rigorous disclosure requirements, including filing annual accounts and reports—such as confirmation statements—with Companies House.

  • Partnership: General partnerships have fewer disclosure requirements, while LLPs have obligations more similar to those of limited companies.

Investment and Raising Capital

  • Limited Company: Can issue shares to raise capital, potentially making it easier to secure investment.

  • Partnership: Relies on capital contributions from its partners and may find it harder to raise external funds.

    These distinctions make limited companies and partnerships suitable for different business owners and objectives, with choices often influenced by liability considerations, tax implications, management style, and the need to raise capital.

Comparison tables of Limited Companies and Partnerships

Understanding these differences is essential when deciding which structure best suits your business needs, considering management preferences, growth plans, and tax implications.

A detailed comparison table showcases limited company vs. partnerships in the UK below:

AspectLimited CompanyPartnership (General/LLP)
Legal Entity StatusActs as a legal entity distinct from its owners.General partnerships are not separate legal entities; LLPs are separate entities.
Liability of OwnersShareholders’ liability is limited to their investment in the limited company.General partners have unlimited personal liability; limited liability exists for LLP partners.
Advantages in TaxationA limited company offers more flexibility in tax planning. Companies can retain profits to manage tax efficiency, and dividends can be timed for tax advantages. The limited company pays corporation tax on profits. Dividends to shareholders are taxed individually.Partnerships offer less flexibility. There is no corporate tax; they must pay tax on their share of the profits regardless of whether they are withdrawn from the business.
Advantages in Ownership ManagementDirectors manage the limited company, which can create a clear separation between ownership and management. This benefits larger businesses or those seeking investment.The owners and managers of a partnership are usually the same people. Partners have direct control over business decisions, providing flexibility and quick decision-making, which is especially beneficial in smaller or service-oriented businesses.
Disadvantages in Registration and ComplianceLimited companies face more complex regulatory requirements, including detailed record-keeping, and filing annual accounts, and public disclosure of crucial information.General partnerships have minimal registration requirements; LLPs require registration with less stringent rules.
Financial ReportingLimited companies file detailed annual accounts and reports with Companies House.Unlike limited companies, general partnerships have minimal reporting; LLPs have more detailed reporting.
Disadvantages in Raising CapitalA limited company can issue shares to the public to raise capital.It depends on partners’ capital contributions; it is more challenging to attract external investment.
Advantages in Transferability of OwnershipShares can be transferred, allowing for easier changes in ownership.The transfer of ownership rights can be complex, often requiring the agreement of all partners.

Which Business Structure Is Right for Me?

At this point, a question could arise in your mind: “Which one should I choose? Limited Company or a partnership?”

The choice depends on various factors, including the nature of the business, ownership, financial goals, and personal preferences for risk and control.

  • Number of Owners: A partnership could be ideal if your business has two or more owners who want to share control and profits equally. A limited company might be more suitable for solo entrepreneurs or larger businesses with one or more owners.

  • Liability Protection: If you are concerned about personal liability for business debts and obligations, a limited company offers limited liability, protecting personal assets.
    All partners are personally liable in a partnership, which could put personal assets at risk.

  • Management and Control: A partnership allows all partners to have an equal say in the management, which can sometimes lead to disagreements. However, a limited company has a more precise structure; shareholders choose directors, which makes it easier to see who is responsible for what and how decisions are made.

  • Taxation: Partnerships offer “pass-through” taxation, where profits and losses are reported on individual partners’ tax returns. However, limited companies are taxed as separate entities and pay corporation tax on profits, which can lead to double taxation when profits are distributed as dividends.

  • Cost of Setup and Administration: Partnerships are generally less expensive and simpler to set up and administer. However, limited companies may involve higher setup costs and more complex administration.

  • Fundraising: Limited companies may find it easier to raise capital from investors, as they can issue shares.
    Partnerships might have more challenges raising external funds, relying mainly on partners’ contributions.

  • Exit Strategy: Exiting a partnership can be more complex compared to selling shares in a limited company.

A limited company might be the right choice based on these factors if you prioritize limited liability, structured management, and ease of raising capital. However, a partnership could be more suitable if you prefer a more straightforward structure with direct control and pass-through taxation and are comfortable with personal liability.

Remember, it’s essential to consult with a legal or financial professional to assess your specific situation and goals before deciding on the business structure.

FAQ

Q1: Is it possible for an individual to form a limited company?

Answer: Yes, it is entirely possible for an individual to form a limited company in the UK. This is often referred to as a “single-member” limited company, where the individual acts as both the sole director and sole shareholder of the company.

Q2: Is it better to have a partnership or a limited company?

Answer: For a non-resident in the UK, a limited company is often a better choice due to limited liability protection and clear tax responsibilities under UK corporation tax laws. It provides a formal and professional structure that benefits international business but has more administrative requirements.

While a partnership is more straightforward to set up and manage, it involves personal liability and potentially more complex personal tax implications. And the business structure is not for a non-resident.

Q3: In the UK, do partnerships have to pay corporation tax?

Answer: No, partnerships in the UK do not pay corporation tax. Partnerships are considered “pass-through” entities for tax purposes, meaning their profits and losses are passed directly to the partners and reported on their individual income tax returns. The partners then pay income tax on their share of the profits, regardless of whether they have received the money.

Q4: Can a limited company be a partner in a partnership?

Answer: Yes, a limited company can partner in a partnership business in the UK. This arrangement is often seen in limited liability partnerships (LLPs) and general partnerships. In such cases, the limited company is treated as a ‘corporate partner’ and has the rights and obligations set out in the partnership agreement.

Q5: How many people are needed to form a partnership?

Answer: At least two people must form a partnership in the UK. These individuals can be natural persons or corporate entities. There’s no upper limit to a partnership’s number of partners. This requirement applies to general, limited, and limited liability partnerships (LLPs). Each type of partnership has its own rules and characteristics, but the common factor is that at least two partners are needed to establish the partnership.

Bottom Line

In conclusion, when choosing between a limited company and a partnership in the UK, it’s crucial to consider factors like liability, management structure, taxation, and the number of owners involved. A limited company offers limited liability and a formal structure suitable for individuals seeking to protect personal assets and raise capital.

In contrast, a partnership, ideal for collaborative ventures, offers simplicity and direct management but comes with personal liability for the partners. Understanding the nooks and crannies of limited company vs. partnership in the UK will help you to align with your business needs, financial goals, and the level of risk you are willing to undertake.

Related Post