The structure of a new or existing business is critical regarding taxation and legal liabilities. Before the LLP Act 2000, the main choices were limited companies or traditional partnerships, with both offering attractive elements for those going into business. So, when the act was introduced in 2001, we saw the creation of Limited Liability Partnerships (LLPs).
In this article, we will look at the process of setting up an LLP while also comparing and contrasting with standard partnerships and touching on comparisons with limited companies.
Setting up an LLP
The process is relatively simple:-
- Choose a name
- Register an address (publicly available)
- Appoint a minimum of two designated members
- Put together an LLP agreement detailing how it will be run
- Register the LLP with Companies House
In reality, the core LLP agreement can be as straightforward or as complex as you want to make it as long as it stipulates in detail how the LLP will operate. It is important to note that a traditional partnership with unlimited liability is not registered at Companies House.
As you might have guessed, there are some restrictions and obligations when it comes to some aspects of the LLP setup:-
The name must be unique, ending in Limited Liability Partnership or LLP and not be considered too similar to an existing name. It must not be offensive, contain “sensitive” words/expressions, or suggest a connection with a local authority/government. The LLP can trade under a different business name, although there are some restrictions. The business name must not include:-
- Limited liability partnership
- Public limited public company
While the LLP name is registered with Companies House, there is no obligation to register the business name.
Remembering that this is the official address of the LLP, which will be in the public domain, there are two primary conditions:-
- It must be a physical address
- In the same country in which the LLP is registered
To avoid any confusion, while your LLP may be registered within the UK, if registered in Scotland, the address must be in Scotland, etc. If you decide to use your home address, remember this will be in the public domain. You can use a PO Box, but it must include a physical address.
There are two ways in which you can register an LLP:-
- Electronically (using approved third-party software)
- By post
In theory, you can do this yourself, but using an adviser will ensure the LLP is set up correctly and the rules and operational guidance are correct.
As we move deeper into the workings of your LLP, it is essential to recognise the responsibilities of each member. There are two different types of members:-
- A minimum of two “designated members” at all times
- An unlimited number of ordinary members
The designated members will have additional responsibilities, which we will cover in a moment. However, non-designated members are still likely to have specific roles in the company. Where relevant, an LLP member can be a company or corporate body; they don’t have to be individuals. However, all members must be registered for self-assessment with HMRC.
Operating your LLP
As part of the LLP agreement, it is essential to specify how it will be run, including:-
- How profits are shared
- How decisions are made
- Individual member responsibilities
- Leaving/joining process
These are examples of the various elements often incorporated into an LLP agreement. As these are legally binding, it is essential to speak with your accountant to ensure that the LLP is set up correctly. It is also vital that every member is made aware of the setup.
Designated member responsibilities
As the term suggests, a designated member has several legal responsibilities above and beyond those of “ordinary members”. These include:-
- Registering the LLP for VAT if over the threshold
- Appointing an auditor where relevant
- Maintaining accounting records
- Producing the annual accounts, which will be registered at Companies House
- Completing (and maintaining) the Companies House confirmation statement for the LLP
- Updating Companies House records with any changes
- Act on behalf of the LLP if wound up/dissolved
This is an example of some of the details which might be changed at Companies House:-
- LLP name
- Registered address
- Member details
It is sensible to look at the setup and running of an LLP in a similar light to a public limited company. There are some differences which your adviser will discuss with you, but it is vital to ensure that records are up-to-date and accounts are filed on the correct date and in the correct format.
Operating a business within an LLP
Now that we have covered the setup of an LLP it is vital to appreciate how they operate and the differences between public limited companies and standard partnerships (as governed by the 1890 Partnership Act).
LLPs and taxation
While an LLP will create accounts registered at Companies House, these will not include tax liability or corporation tax calculations. Also, all profits within an LLP must be paid out to members at the LLP year-end, while a traditional partnership can retain a portion of earnings for future use. Each member of the LLP will receive a share of the profits, predefined at an early stage, on which they will be charged tax individually.
Employees and salaried members
In line with a traditional business, an LLP may have salaried employees/members. These payments are made through the conventional PAYE system, and the designated members must ensure national insurance and income tax payments are paid. LLPs can also use the services of self-employed individuals in the usual manner.
Unlike public limited companies, LLPs and traditional partnerships do not issue shares. The LLP rules define the split in profits and can be modified, but the changes must be registered appropriately.
An LLP and public limited companies are recognised as legal entities, but a general partnership is not. Consequently, a public limited company and LLP can:-
- Own property
- Secure finance
- Sue and be sued
- Take legal action
The legal liability of a public limited company and an LLP is limited to the funds invested and the guarantees given by members. Therefore, a member’s income and assets outside of the LLP (and not subject to any guarantee arrangement) are protected. When it comes to traditional partnerships, the entire burden of debt and any other liabilities are the responsibility of the partnership members.
How to Set Up an LLP – Summary
Taking financial advice before committing yourself to an LLP, public limited company, or traditional partnership is essential. Many believe that the laws surrounding LLPs provide the best of both worlds, flexibility and limited liability, although there is a degree of information made public via Companies House. The process is relatively simple, and the cost of setting it up is low compared to some options. However, the tax treatment is a little more complex for the members.