When going into business together, many entrepreneurs may not realise the legal implications of forming a partnership. Even if the partnership is not formally registered, by virtue of doing business together, the Partnership Act automatically applies.
When going into business together, many entrepreneurs may not realise the legal implications of forming a partnership. Even if the partnership is not formally registered, by virtue of doing business together, the Partnership Act automatically applies. It is therefore important to decide upon the best type of partnership or company to form and register with your partner. Here, we take a look at limited liability partnerships to help you make the best choice for your business.
A limited liability partnership vs a traditional partnership
In terms of tax liability, profit distribution, and internal management, a limited liability partnership (LLP) has the same structure as a traditional partnership. The core difference between them lies in the partners’ financial accountability.
In a traditional partnership, the partners are fully liable for all of the business’s debts; in an LLP, on the other hand, the partners are not liable for the business’s debts, only the capital they initially invested into the business.
The LLP agreement outlines each partner’s specific duties, responsibilities, and liabilities, as well as details for the allocation of profits, terms for the removal or addition of partners, and terms of dismissal. It is therefore usually a more attractive option for people going into business together than a traditional partnership.
Forming an LLP
To register an LLP, you will need at least two members; to register on your own, you will need a second dormant company to serve as the second member. You will also need a unique LLP name, a registered office address, and a statement of compliance. Forming an LLP also requires two ‘designated members’ in addition to the partners; their role is to perform additional administrative and managerial duties on behalf of the LLP and other members.
Once you have all of the above factors, you can register your LLP online with Companies House by purchasing the 1st Formations’ LLP company formation package for £39.99. Once the package and any necessary address services have been purchased, simply complete the online application form and file it electronically with Companies House. The partnership will be incorporated within three working hours.
The advantages of an LLP
Less financial liability
LLPs can be hugely beneficial for certain businesses. Firstly, the reduced financial liability for partners is very attractive; partners cannot lose more than their initial investment if the company gets into financial difficulty or faces legal claims.
LLPs offer a great deal of flexibility when it comes to their internal structure, allowing partners to vary the structure as often or extensively as needed.
Lower tax bill
In terms of taxation, LLPs do not pay corporation tax or file Company Tax Returns. Partners are taxed as individuals and must file a personal self-assessment tax return annually, while the LLP must file a partnership self-assessment tax return. Partners must also pay National Insurance (NI) contributions in addition to paying income tax and filing their own tax returns. However, as they are considered self-employed, their NI contributions are much lower than for directors in a limited company. This in turn significantly lowers the LLP’s overall tax bill, and allows partners to take home the same net salary as directors, even when the business is earning less. (It should be noted that this does not apply to salaried LLP members who are considered employees for tax and NI purposes once certain conditions are met.)
Lastly, partners in an LLP are automatically able to run their business’s operations, unlike shareholders in a limited company, giving partners greater control.
Is an LLP right for you?
Deciding on the appropriate structure for your business will depend on various factors, ranging from the nature of the business to your preference for taking home profits. Seeking the advice of an experienced solicitor is therefore strongly recommended before registering your business as an LLP, limited company, or other entity.
For more information or for expert advice on business or personal legal issues, contact us online at Carter Bond Solicitors today or call us on 0 33 33 44 44 11.
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