Whether you’re just starting out in business or have years of experience at the helm. It is always important to ensure that your business is operating using the correct vehicle for your situation but with multiple options available how are you to know which is best for you and your business? In todays article we will be looking at two structures in particular as we compare LLP vs LTD.
What Is A Limited Company?
The limited company is one of the most popular vehicles for a business to operate under for a variety of reasons. Firstly a limited company (Ltd) is considered to be a separate legal entity than those who own and run the business. This provides owners with a degree of confidence that if the business fails then their personal assets will be protected and will not be used to pay any outstanding liabilities the business may have. A limited company can be limited by shares or by guarantee.
A company is usually limited by shares where the aim is to trade and to make a profit. The profit is kept by the company and after paying tax it can choose to distribute those profits to shareholders in the form of a dividend. Because it is a choice, if and when dividends are paid to shareholders the ltd company can use timing to it’s advantage and distribute profits in a tax efficient manner.
A company is usually limited by guarantee where the aim is not to make a profit. In this case the company will have guarantors and guaranteed amounts. Profit made by the company must be reinvested back into the company. In both cases though the liability of the shareholders or guarantors is limited to the capital introduced or the amount guaranteed in the members agreement and as such personal assets remain protected.
What Is A Limited Liability Partnership?
A limited liability partnership (LLP) is a relatively new concept by comparison which first became available in 2001, it is a hybrid between a traditional partnership and a limited company but shares more of it’s characteristics with a limited company than it does with the traditional partnership.
One difference between the LLP vs LTD is that an LLP has members instead of shareholders and must have a minimum of 2 members although there is no upper limit. As the name suggests liability for the members is also limited as the LLP is considered a separate legal entity from it’s members.
The amount that each member will be liable for should the business run into difficulty will be detailed in the members agreement along with details of how profits will be split between members. A popular feature of the LLP is that each individual partner can protect themselves from the misconduct of another partner which is not the case in a traditional partnership. For this reason amongst others this type of setup is very popular amongst professional partnerships such as accountancy firms and solicitors.
Similarities Of LLP VS LTD
There are a number of similarities between LLP VS LTD that may help when trying to choose between the two. Below are some of the key similarities to consider:
- Both LLP’s and LTD’s are incorporated and registered at Companies House
- Both structures (LLP vs LTD) will need to submit accounts and a confirmation statement to Companies House on an annual basis
- Both LLP VS LTD are considered separate legal entities and therefore offer shareholders/members a degree of confidence that their personal assets are protected and will not be used to repay business liabilities. In both cases the amount a shareholder/member could lose is limited although the way in which it is limited and the amount can vary depending on the structure.
Differences Between LLP VS LTD
As well as similarities there are also a number of key differences to be considered when comparing LLP VS LTD. Some of the main differences are listed below:
- Share capital is only a feature of a limited company and will not be found in an LLP. The LLP has no shareholders but has members instead who are entitled to a split of the profits. The percentage split will be determined in the members agreement.
- Shareholders of a ltd company may receive income in the form of dividends which will be taxed using dividend tax rates whereas any profits distributed to members of an LLP will be taxed under income tax rules (occasionally capital gains). As such the amount of tax paid on distributions can vary significantly. We will look at tax efficiency later in the article.
- Flexibility is greater with an LLP vs LTD because the LLP structure is less rigid and easier to amend whereas a company limited by shares lacks some of this flexibility as there are stricter rules that must be followed under the companies act 2006. Which is considered stricter than the equivalent LLP legislation.
- A LLP is considered to give it’s members a greater degree of privacy compared to that offered to shareholders in a ltd company. The limited company’s articles of association are on public record at Companies House with details such as share splits available for all to see. The LLP will detail profit splits in its members agreement which is not filed at Companies House and not on public record.
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Resale Of The Business (LLP vs LTD)
It is also important to consider whether you are likely to want to sell the business at some point in the future as this may help with the decision between LLP VS LTD.
From a resale point of view a ltd company would usually be considered easier to sell and attract more investors. Partly because the way the business is structured with shares and share capital, which means that an investor can potentially purchase shares but not necessarily need to become a director and get involved with the running of the company whereas an investor would need to become a member to gain entitlement to a share of future profits of the LLP.
Usually where a business is being built with a view to sell in the short term the owners should consider this when choosing a vehicle for the business rather than setting up and changing your mind later.
Of course this is just one factor to consider when comparing LLP vs LTD.
Individuals In Business
You would be forgiven for thinking that the LLP VS LTD debate isn’t actually worth debating for businesses owned by a single individual as by definition any kind of partnership needs at least 2 partners which might rule out the LLP.
Of course a limited company can be formed with a single shareholder which would make that the obvious choice to most. In practice some individuals will form ltd companies to act as the other member in their LLP.
Although this doesn’t sound like the most practical solution the individual manages to keep some of the flexibility and privacy offered by the LLP whilst at the same time enjoying some of the tax planning opportunities offered by a limited company and meets the minimum member requirement.
So the choice between LLP vs LTD remains a debate for owner managed businesses for this reason.
Not For Profits
If you run a not for profit organisation such as a charity then there are a number of different structures available to you but the LLP is not usually one of them which means that if you are comparing LLP VS LTD for your not for profit then the answer is almost certainly LTD.
As mentioned above not for profit organisations who operate as ltd companies will be limited by guarantee.
Tax Efficiency
It’s difficult to know which of the LLP v LTD is the most efficient for tax purposes as again what could be more efficient for one business could be less efficient for another. There are many variables to consider such as the shareholders/members other sources of income and levels of income.
What is for sure is that the ltd company offers a great deal more flexibility in terms of how and when profits are distributed. An LLP splits profits as they arise between members in accordance with the profit split detailed in the members agreement. Those distributed profits are then subjected to income tax or capital gains tax whereas once a ltd company has paid corporation tax on it’s profits it free to pay dividends whenever the directors choose and of any amount they choose (providing they have enough retained profits to cover it).
This allows for better tax planning. On top of this, in owner managed ltd companies the director/shareholders can also take a salary (pre corporation tax). This again will allow for greater tax efficiency by combining the two sources of income.
Which Is Better? LLP VS LTD
There is no easy answer to this question as each lends itself better to certain situations. What might be the right choice for one business could be completely wrong for another. It is very important to consider all of the advantages and disadvantages of each but also consider the future requirements your business may have. Do you plan to sell the business? Do you need to add and remove business partners on a regular basis? Do you mind ownership details being on public record?
When considering which setup to choose we would always recommend speaking to an accountant who can help you with the decision making process.
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
