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:
- Do you intend to draw all profits generated by a company in the same tax year?
- What amount of profit do you hope to make?
- Which type of company is better suited for your business?
- A LLP is not required to keep minutes of the meeting, reducing the admin work, whilst it is a requirement for a limited company.
Asset Protection and Residency
- Which provides better limited liability, the limited company or the limited partnership, if at all?
- Does your company have a business loan or intend to apply for one at some point?
- Do you reside or are domiciled in the UK? This will affect your personal tax liability and your tax payable.
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|
|Extraction of profits||
|Disclosure|| LLP Agreements are not submitted to Registry
An annual return and accounts required to be submitted along with other returns
|Records||Details and minutes of meetings are not required||
|Withdrawal of profits||Because there are no rules of ‘capital maintenance’, LLP members are free to withdraw profits||
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:
|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|