LLP vs LTD business structures

This guide gives a brief comparison of limited liability partnerships (“LLPs”) and private limited companies ("LTD") as business structures in the UK.

LLPs are often used for professional service businesses whilst companies tend to be used for trading businesses, but there are a number of commercial and tax points to consider when deciding what structure best suits a business.

1. Similarities
2. Differences
3. So, what's the difference?
4. Further information

LLP vs LTD similarities

An LLP is a hybrid of a private limited company and a traditional partnership. It is designed to combine the limited liability which the members of a limited company enjoy with the benefits of flexibility, confidentiality and tax transparency provided by unlimited partnerships. LLPs are far more similar to limited companies than they are to traditional partnerships. As such, limited companies and LLPs share several essential characteristics as follows:

• Incorporation and set-up

Both LLPs and limited companies are incorporated at Companies House. A limited company will have directors and shareholders, while an LLP only has members. The constitutional document for a limited company is its Articles of Association (and any corresponding Shareholders’ Agreement). The equivalent for an LLP is the Members’ Agreement. Please see our separate Client Guides on ‘Incorporating a new Limited Liability Partnership’ and ‘Incorporating a New Company’ for further information.

• Separate legal personality

Each is a body corporate with separate legal personality, meaning that each can enter into contracts, own property and sue and be sued in its own name. When the members of an LLP agree that the LLP is to enter into a contract, they generally bind the LLP in the same way as directors bind a limited company.

• Limited liability

Unlike a traditional partnership, members of an LLP or limited company have limited liability meaning generally, they do not need to meet the liabilities of the LLP or limited company. The liability of a member of a limited company will be capped at the amount unpaid on any shares that he or she holds. The liability of a member of an LLP is limited to the amount of capital which he or she agreed to contribute under the Members’ Agreement.

LLP members and the directors of a limited company will generally only become personally liable for the debts or liabilities of the LLP or company in certain limited circumstances (such as wrongful or fraudulent trading).

• Filing requirements

Both LLPs and limited companies are required to file accounts and a confirmation statement annually with Companies House. Both must also create and maintain a register of people with significant control at Companies House. Where certain changes are made to the LLP or company Companies House must also be notified within a certain time.

• Fixed or floating charges

Both LLPs and limited companies can grant fixed and floating securities over their assets as security.

Differences between LLP vs LTD

Despite the similarities between the two corporate vehicles, there are a number of key differences which should be taken into account when considering the most appropriate structure for your business:

• Organisational flexibility

Both an LLP and a company do offer flexibility in terms of structure, but members of an LLP arguably enjoy greater organisational flexibility and are free to agree the affairs and governance of the LLP between themselves. The affairs of a limited company must be managed within the confines of the Companies Act 2006, which places stricter restrictions on limited companies than the equivalent LLP legislation.

As a result, LLP members have greater flexibility as to how they share profits, remove capital, their management structure, how decisions are made, and the way in which members are appointed and retire.

• Confidentiality

Unlike a limited company whose Articles of Association are publicly available at Companies House, an LLP Members’ Agreement is private. This Members’ Agreement will cover issues such as profit and loss sharing, shares in capital, management responsibilities, admission of new members, retirement and expulsion of members, and dispute resolution. If the members fail to deal with these matters, the LLP legislation contains some default provisions, although it is best practice to have an agreement in place.

Although this level of confidentiality may be desirable, it is worth remembering that a certain level of confidentiality can be achieved with the limited company structure by means of a Shareholders’ Agreement which can sit alongside the Articles and does not have to be filed at Companies House.

• Tax treatment

For tax purposes, an LLP’s business is treated as a partnership. This means it is tax transparent in that the entity of the LLP itself is not taxable, and instead the members are taxable as individuals both on profits earned by the LLP and gains on the sale of LLP assets. Usually, the members of an LLP are treated as self-employed and will be liable to pay income tax on their share of the LLP’s profits.

On the other hand, a limited company is treated as a separate entity for tax purposes and it will pay corporation tax on the company’s profits. The directors will generally be liable to pay income tax on their salaries. The shareholders of a limited company will pay tax on any dividends they receive and on any gains arising when they transfer their shares in the company.

The LLP structure may be more tax-efficient in some cases as it avoids the double taxation situation where the limited company pays corporation tax on its profits and then the shareholders and directors pay additional tax on any dividends and salaries paid by the company. However, the rate of corporation tax is lower than rates on the higher or additional rate income tax bands. Shareholders also enjoy a tax-free dividend allowance and lower rates of tax on any dividend income received above the allowance, so a limited company structure may be more tax-efficient in some situations.

There are also a number of approved tax-efficient share plans available for employees in private limited companies.

• Investment and sale

Limited companies are often viewed as more attractive from an investor’s perspective, as they can buy shares in a limited company without having to become a director.  An investor in an LLP would have to become a member and a share or part of the LLP cannot be sold in the same way that company shares can be.

Similarly, from an investment and sale perspective it is generally more straightforward to invest in and sell shares in a company compared to an LLP.

• Share capital

Unlike a limited company, an LLP has no share capital and there are no capital maintenance requirements which are in place for a limited company.

So, what's the best option between LLP vs LTD?

Both LLPs and limited companies are well known and commonly used business vehicles in the UK offering flexibility and limited liability. When comparing them, it is important to consider what is most appropriate for the business in question and its required structure and the nature of its business. Full legal and tax advice should be taken before making a decision about the most appropriate legal structure.

Further information on LLP vs LTD

We hope that this provides a helpful summary of the position. This guide is not legal advice, but should you require any further advice or assistance, please do not hesitate to contact us.