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LLP or Limited Company?

LLP vs Limited Comparison

A UK LLP is an ideal way of doing business. As its name suggests, a Limited Liability Partnership is a partnership which has limited liability.

Contrary to the traditional concept of the ‘partnership’, a LLP is an innovative structure that helps you benefit from the limited liability of a corporation while you are taxed only on your income as in a partnership. A LLP does not pay corporation tax.

Both the Limited and LLP companies offer benefits, which can be obtained in terms of management structure and taxation. Due to this, it is not possible to give a straight forward answer as to which is the best legal structure for your business. It is best for you to make your decision based on your circumstances.

A few points you may consider are when choosing between the two.

Taxation – does a LLP pays more tax than a limited company?

There is no simple answer to this. A few points to consider when deciding between the two:

Asset Protection and Residency

Tax on income is the same. Income tax is payable on all income generated in the UK regardless of whether you reside or are domiciled outside the UK. Also, foreign income is subject to UK tax but will be taxed depending on your status as a tax payer. Where residency and domicile are considered, tax rules for limited companies and LLP’s are the same.

The main features of LLP vs a Limited Company can be summarised as follows:

UK Company Features UK Limited Liability Partnership UK Limited Company
  • LLP Act 2000
  • Companies Act 2006
Capital Requirements
  • Does not issue shares
  • No minimum capital requirements
  • Minimum capital requirement of GBP1 (recommended GBP100.00)
  • Minimum of 2 members.
  • No secretary required Designated member needed to perform compliance duties
  • Minimum of 1 director
  • Not obligated to have a secretary (but we advise customers to appoint one to reduce responsibilities of director(s))
  • Not obligated to hold meetings
  • Must comply with regulations for meetings
Extraction of profits
  • Profits allotted according to LLP Agreement
  • Earnings may be withdrawn through dividends
  • Liability limited by value of capital contributed. Professional negligence by a member could lead to personal liability
  • Limited to the value of unpaid shares
Disclosure LLP Agreements are not submitted to Registry

An annual return and accounts required to be submitted along with other returns

  • Shareholder information and profit split accessible by public at Registry
  • An annual return and accounts required to be submitted along with other returns
  • Abbreviated accounts required for small companies
Records Details and minutes of meetings are not required
  • Records and minutes of meetings must be maintained; registers of directors/shareholders/secretaries must be maintained
Withdrawal of profits Because there are no rules of ‘capital maintenance’, LLP members are free to withdraw profits
  • Rules for capital maintenance restrict members from withdrawing profits if accumulated profits are insufficient

Tax differences between a LLP and a limited company can be summarised below:

Limited Liability Partnership Limited Company
Corporation Tax Only payable if members are companies involved in trade. Payable by all Ltd companies:
  • Small companies — 20%
  • Large companies — 24% from April 2012, to be reduced to 22% by April 2014)
PAYE, NIC (Class 1, 2, 4) Not payable by members of but Class 2, 4 apply Payable by ltd. company, and Class 1 applies to directors
VAT Payable irrespective whether is a LLP or a Ltd. company Payable
Accounting Reference Date (ARD) From 6th April to 5th April Can be chosen by the company
Treatment of losses carried forward Subject to restrictions but rules are generally flexible for a LLP Can carry trading losses against available profits forward indefinitely
Deferral of tax liability Not possible Can be done through dividend payment and ARD
Enterprise Investment Scheme (EIS) Not available Can be registered for
Entrepreneurs’ relief (ER) Available Can be applied for
Interest Relief on Investment Business Not applicable to both Can be applied for

by Elena Genovese