An Limited Liability Partnerships (LLP) blends aspects of both a partnership and a limited company. It offers flexibility in management and profit distribution while providing limited liability. Here are 7 important considerations if you’re deciding whether an LLP is the right structure for your business:

1. Limited Liability 

Like a limited company, an Limited Liability Partnerships is a separate legal entity that can enter contracts, own assets, and be sued. Partners’ liability is limited to their investment, so personal assets are generally protected unless they’ve signed personal guarantees.

2. Taxation

LLP: Partners are taxed personally on their share of the profits, even if profits remain in the business. For example, if two partners share £100,000 profit, each is taxed on £50,000 (or as agreed). Tax rates depend on their personal income bands.

Limited Company: The company itself pays corporation tax on profits (currently 19%-25% depending on the profit level), and shareholders pay personal tax when taking dividends. This can offer more flexibility for tax planning, especially for those reinvesting profits.

3. Profit Distribution Flexibility

Limited Liability Partnerships allow profits to be distributed unevenly, based on agreements between partners. This is useful when partners contribute differently to the business. By contrast, limited company dividends must be distributed according to shareholdings, often leading to equal profit splits if shares are equally held.

4. Building the Balance Sheet

Limited companies can accumulate and reinvest profits without being subjected to personal taxation, ideal for businesses building assets like property or stock over time. In an LLP, profits are taxed at the partner level as they are earned, impacting this kind of financial planning.

5. Best for High Earners

LLPs may be advantageous for high earners who plan to take profits regularly rather than reinvesting them. At higher income levels, partners who extract all profit will just be subjected to personal tax and some national insurance which may be lower when compared to extracting funds from a limited company, which incurs both corporation tax and personal taxes.

6. Minimum Partners and Flexibility

LLPs must have at least two members, though one can be a limited company. This arrangement allows for flexibility in how the business is structured and managed, but it introduces complexities around tax and profit distribution, requiring careful planning.

7. Transparency and Filing Requirements

LLPs are required to file annual accounts and confirmation statements with Companies House, ensuring transparency similar to limited companies. This level of reporting can be surprising to new members.

Additional Considerations for Limited Liability Partnerships

Future changes in government policy, especially those around tax, might also impact decisions on business structures. For example, a potential Labour administration could bring changes to capital gains, inheritance, and property taxes, affecting the benefits of LLPs. In addition, the Autumn budget on the 30^th October could bring taxation changes that alter the decisions around LLPs.

LLPs offer flexibility in management and profit-sharing, but limited companies are often preferred for long-term asset growth and financial strength. When choosing a structure, it’s crucial to consider your long-term business goals, tax implications, and compliance requirements. For expert advice, contact Bracey’s Accountants and book a free 30-minute consultation to find the best structure for your business needs.

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