What is an LLP?
Limited Liability Partnerships (LLP’s) are a legal format in which to run a business. They were introduced on 6 April 2001 after The Limited Liability Partnerships Act 2000 received Royal Assent on 20 July 2000. They were introduced to provide protected liability to partnerships that was previously only available as a limited ‘company’. LLPs are typically used by professional partnerships such as accountants, solicitors, surveyors, and architects etc. Not all partnerships are LLPs and some partnerships are still unlimited in terms of liability. They can be registered in England, Wales, Scotland or Northern Ireland.
LLPs are not as common as LTD companies. They are not suitable for many types of business due to the way they are managed and taxed. In general terms LLPs are used by professions where each member’s financial contribution and generated income is clear.
Points to consider
Separate legal entity
The LLP is deemed to be a separate legal entity. It can enter into contracts, open bank accounts, employ people, and own assets (property, equipment, cars, etc.). Whilst members in the LLP may change the legal entity remains constant.
One of the main benefits on an LLP is the limited liability. The partner’s liability is limited to the amount of money they have personally invested in the business. The extent of any additional liability may also be included within a partnership agreement. The LLP members are not liable for any financial problems or debts that the business may face in the future.
More than one person
An LLP is a partnership of two or more people coming together for the good of one business. There must always be at least two members in an LLP or the LLP must be dissolved. You cannot have a partnership of one. If you enter into a partnership with a business associate you should consider what would happen in the event of one of you choosing to leave the partnership. You may prefer to register a limited company.
An LLP does not pay tax on its income. The members will pay tax on the profits that they have generated for the business. This is taxed as personal income and is not treated in the same way that a company’s profit is subject to corporation tax. Profit is not retained within the business in the same way that a company may retain profit.
Switching between LLP and LTD
It is not possible to simply switch between operating a business as a Limited company or an LLP. Both are separate legal entities governed by different laws. In the event that you want to change your legal structure it would be necessary to form the new entity and transfer the business assets to the new entity. You may then close the previous LLP or company or keep it in a dormant state once final accounts have been prepared.
It is recommended that all partnerships have an agreement in place. Whilst this can be a verbal agreement, for the sake of clarity, it is recommended that partnership agreements are in writing. The agreement will typically cover distribution of profits, management of the LLP, rights and responsibilities of partners, cessation of the business and other activities. You can buy a partnership agreement template online but it may be necessary to seek legal advice to tailor make a professional agreement.