A guide to limited liability partnerships (LLPs)

Limited liability partnerships (LLPs) were introduced in 2001 by the LLP Act 2000 as an alternative to the traditional general partnership model. This legal business structure is an ideal choice for the types of professions that normally operate as partnerships, such as solicitors, accountancy firms, and dental practices.

An LLP shares the same characteristics as a normal partnership structure in terms of tax liability, internal management, and the distribution of profits, but it also provides reduced financial liability, or ‘limited liability’, to each LLP member (partner).

What is the difference between traditional partnerships and limited liability partnerships?

A partnership is a type of business structure that can be set up by two or more people. You can operate as a traditional partnership or a limited liability partnership. The main difference between traditional and limited liability partnerships is the level of financial responsibility of the partners.

Traditional partnerships place the full burden of business debts upon the partners. LLPs place reduced financial liability upon the partners, which is a more desirable option for many people. It is similar to the financial protection offered to limited company shareholders.

The introduction of limited liability partnerships has enabled certain professions that normally operate as traditional partnerships to benefit from the reduced financial risk of a limited company, while still enjoying the flexibility of a partnership in terms of internal management structure, taxation, profit distribution, and the rights and duties of partners.

What is the difference between limited companies and limited liability partnerships?

Private limited companies and LLPs are two types of business structures that have to be incorporated at Companies House under the Companies Act 2006 and the LLP Act 2000, respectively. They share some similarities, such as limited liability for members, and more extensive filing and reporting requirements.

However, companies and LLPs are vastly different, primarily vis-à-vis the flexibility of their internal management structures and how profits are taxed. Take a look at our bullet lists below for a fuller understanding of their similarities and differences.

About private limited companies

• Can be limited by shares (for-profit) or limited by guarantee (non-profit)
• Must have at least one shareholder/guarantor (owner) and one director (manager) – one person can assume both roles
• Must have a registered office address in the same part of the UK where they are incorporated – England and Wales, Scotland, or Northern Ireland
• Pay Corporation Tax on all profits
• Must file annual accounts, a confirmation statement and a company tax return each year
• Shareholders receive a share of company profits in the form of dividend payments
• Shareholders’ rights, responsibilities, and liabilities are determined by the number, class, and value of their shares
• Internal structure and management rules are set out in the articles of association and shareholders’ agreement
• Companies limited by shares can sell shares in exchange for capital investment
• Must maintain a PSC register

About limited liability partnerships

• Must be set up as a profit-making business – cannot be used by non-profit enterprises or charities
• Must have at least two members at all times
• At least two partners must be ‘designated’ members and assume additional legal responsibilities on behalf of the entire LLP and its members
• There are no shares, shareholders, or directors in limited liability partnerships
• Must have a registered office address in the country of incorporation
• LLPs do not pay Corporation Tax – each LLP member is taxed as a self-employed individual through Self Assessment
• Annual accounts and a confirmation statement must be delivered to Companies House each year
• The limit of each LLP member’s liability is agreed between the members and usually stated in a partnership agreement
• Limited liability partnerships have a flexible internal structure that can be changed at any time, as often as required
• LLPs do not have shares to sell and, therefore, cannot receive capital investment from non-LLP members in exchange for a portion of ownership of the business
• Must maintain a PSC register

Should I form a limited company or an LLP?

The most suitable structure depends on a number of factors, such as the kind of business you have, the number of people setting it up, your preferred internal management structure, tax liabilities, profit distribution, and the options you would like for removing profits and keeping surplus income in the business.

When to choose an LLP

An LLP is a great alternate structure for any business that currently operates as a traditional partnership with a small and consistent number of members who each make comparable contributions and draw similar profits.

Limited liability partnerships are also particularly beneficial for partnerships involved in high-risk services or any activities that increase the likelihood of claims for damages being made. Furthermore, the flexibility offered by a partnership structure is often the determining factor for certain professions.

When to choose a company

If your business is non-profit, your decision is clear-cut. You should form a company limited by guarantee. If you wish to sell shares in your business to raise capital, and/or you plan to employ lots of people with a payroll that will likely be higher than the owners’ salaries, a private company limited by shares would be a better choice regarding tax efficiency.

How many people are required to set up an LLP?

Limited liability partnerships must be registered with a minimum of two LLP members. However, it is possible to form an LLP on your own by setting up a dormant company as the second member.

How to form an LLP

Limited liability partnerships can be registered at Companies House online. 1st Formations LLP company formation package is available for £74.99 (+VAT) and allows you to incorporate a partnership in just 3 working hours.

Simply purchase the package and any required address services, complete the online application form, and file it electronically at Companies House.

You will be required to provide the following information on the application form:

• Unique LLP name
• Registered office address
• Members’ details – minimum of 2 members required
• Designated members’ details – minimum of 2 required
• A statement of compliance
• Information about people with significant control (PSCs)

Your LLP will be ready to start trading as soon as your application has been approved. We will send you a welcome email containing digital copies of your incorporation documents. Hard copies will be posted to your registered office within 24 hours.

How long does it take to form an LLP?

Using a company formation agent’s online services, an LLP can be formed with Companies House in 24 hours.

Who owns an LLP?

Limited liability partnerships are owned by LLP members. An LLP must have at least 2 members, but there is no upper statutory limit.

What are ‘designated’ members?

Limited liability partnerships must register at least two partners as ‘designated’ members. These individuals will take on additional administrative and managerial responsibilities on behalf of the LLP and other members. Their duties will include:

• Preparing and filing annual confirmation statements and annual accounts
• Registering the partnership for Self Assessment
• Registering the partnership for VAT, if applicable
• Reporting changes to Companies House and HMRC
• Maintaining accounting records
• Maintaining statutory registers, including a PSC register
• Appointing an accountant or auditor
• Representing the LLP in any legal proceedings or during the dissolution process
• Ensuring the LLP and its members adhere to all forms of statutory compliance

If no two members are designated, the law views all partners as designated members.

How are limited liability partnerships taxed?

Limited liability partnerships do not file company tax returns or pay Corporation Tax, but they do have to register for VAT if their annual taxable turnover exceeds £90,000 (VAT registration threshold from 1 April 2024).

LLP members are taxed individually on their share of the profits. This means that each of them has to register with HMRC for Self Assessment, file a tax return each year, and pay Income Tax and National Insurance contributions (NIC) on their personal income.

• Set up a limited liability partnership today
• The importance of an LLP agreement
• Benefits of converting an LLP to a limited company

This differs slightly from company directors who receive a salary through PAYE. However, directors are still required to register for Self Assessment and prepare their own tax returns if they receive dividends from shares or any other untaxed income.

LLP members must maintain accurate accounting records for the work they carry out, which they will then use to complete and file their Self Assessment tax returns.

Salaried LLP members

There are new rules for salaried LLP members, whereby they must be treated as ‘employees’ for tax and NIC purposes if all of the following conditions are met:

• Significant influence (The member has no significant influence over the affairs of the partnership)
• Disguised salary (The LLP member performs services for the LLP in exchange for an income of which at least 80% is fixed, or income that is variable but not affected by the LLP’s overall profits or losses)
• Capital contributions (The member’s contribution to the partnership is less than 25% of the disguised salary)

These rules do not affect partners in traditional or limited partnerships (they only apply to members of limited liability partnerships), nor do they necessarily affect all members of an LLP because it is entirely possible for an LLP to have both self-employed and employed members.

In all likelihood, the new rules will affect most LLPs because, more often than not, only senior partners have significant influence over business affairs. Where these rules apply, Limited liability partnerships are required to pay members’ salaries and National Insurance contributions through PAYE.

What is the liability of an LLP?

Limited liability is a form of financial protection that reduces the amount of money each partner has to contribute toward debts and third-party claims. The liability of an LLP and its members is limited to what the partners invest and any personal guarantees put in place. Beyond this, members’ assets and finances are protected.

This is one of the foremost reasons to form a limited liability business. Traditional partnerships have unlimited liability, so the partners are wholly responsible for all debts.

What are the filing requirements of an LLP?

Limited liability partnerships must file annual accounts and confirmation statements at Companies House every year. Any changes to their registered details must be reported to Companies House as soon as possible. Designated members are responsible for fulfilling these requirements.

LLP members are responsible for preparing and filing their own Self Assessment tax returns for HMRC every year and paying Income Tax and NIC on their individual share of the profits.

Can an LLP be dormant?

Yes, an LLP can be dormant if it has no ‘significant accounting transactions’ during an accounting period. Such transactions must be entered in the LLP’s accounting records.

Can I register a limited liability partnership as a charity?

Limited liability partnerships can only be registered by businesses that intend to make a profit, so it is not possible to set up an LLP for non-profit or charitable purposes.

If you wish to run a non-profit business or charity, you can form a private company limited by guarantee, a charitable incorporated organisation (CIO), a charitable trust, or an unincorporated charitable association. Take a look at the differences below.

Private company limited by guarantee

• Must register at Companies House as a limited company and with the Charity Commission (England and Wales) or the Office of the Scottish Charity Register (OSCR) as a charity
• Companies House requires a company to have at least one director and one guarantor, a registered office address, and a memorandum and articles of association
• The charity regulators require the appointment of at least three trustees
• Must comply with both company law and charity law
• Must report to the relevant charity regulator and Companies House
• A charitable company can own property and employ staff
• Directors and trustees are not personally liable for the debts or liabilities of the charity
• Guarantors are only personally liable to pay the sums of their guarantees toward company debts

Charitable Incorporated Organisation (CIO)

• Available for charities in England and Wales that wish to set up as a corporate body
• Only required to register with and report to the Charity Commission
• Commonly used by small and medium charities that do not want a wider membership
• Charity becomes a distinct legal entity upon registration
• Must have at least three trustees (typically, the trustees are the only members of the CIO)
• Regulated by charity law only
• Trustees have limited or no liability for the organisation’s debts or liabilities
• Scottish charities can set up as a Scottish Charitable Incorporated Organisation (SCIO) through OSCR

Charitable trust

• Unincorporated structure with no legal identity of its own
• Run by a small group of trustees
• Trustees are personally liable for debts and liabilities that cannot be met out of the trust’s resources
• Rules are set out in a Trust Deed
• Trusts do not typically raise finance or distribute profit – they normally hold and manage assets such as money, investments, land, or buildings
• Usually, do not employ a significant number of staff or carry on any kind of business activity
• Often set up in conduction with unincorporated associations

Unincorporated charitable association

• • Group(s) of volunteers that to come together for a common charitable purpose
  • Ideal for charities that wish to have a wider membership but will be small in terms of assets
  • Usually governed by a management committee who must adhere to the association’s constitution
  • Members of the committee have unlimited personal liability
  • Cannot own property or employ staff

Can I appoint a CEO and CTO to my limited liability partnership?

There is no legal obligation for an LLP to confer either of these titles to any partner or employ someone else to act in such capacities. It is entirely up to the LLP members whether to do so. Ultimately, the need for a CEO and/or CTO will depend on the internal management structure, the size and needs of the LLP, and the industry in which it operates.

The most senior partner in an LLP can be appointed as the Chief Executive Officer (CEO), but there is no need to use this particular title. Furthermore, if an LLP operates in the IT industry or requires in-house IT expertise, it may be desirable or necessary to appoint one of the partners as a Chief Technical Officer (CTO).

Typically, a CTO will be expected to:

• Examine and monitor the technological needs of the business
• Assume responsibility for long-term strategy
• Manage research and development (R&D)
• Identify opportunities and risks
• Maintain technology standards and adhere to compliance regulations
• Address all other technological needs of the business

A CTO will report directly to the CEO, who is ultimately responsible for making management decisions.

Appointing a non-partner as a CEO or CTO

If none of the partners possess the required skills or desire to assume either one of these positions, you can employ someone as a CTO without making them an equity partner. However, it would be unusual and risky to appoint a non-partner as CEO because this is the highest-ranking management position in a business.

Create a Partnership Agreement

In the event of certain LLP members being prescribed more authority and seniority than other partners, regardless of what title they are given, it is essential that a Partnership Agreement is drawn up.

This document will officially outline the duties, responsibilities, and powers of each partner in the LLP, and it will ensure that all members are in full agreement about their individual roles and level of authority, thus avoiding uncertainty and potential conflicts in the future.