When most people think of a company they tend to think of the very well known limited company rather than the less well known limited liability partnership (LLP) which is also a registered corporate body with Companies House. In todays article we will look in some detail at this less well known corporate body and answer the question – What is a LLP company?
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What Is A LLP Company?
A limited liability partnership or LLP is a type corporate body that can be registered at Companies House. It is one of many structures that a business can choose to operate under. A relatively new concept as it was first introduced in 2001 the limited liability partnership has proven popular with professional businesses such as accountancy practices and solicitors. The general idea of a LLP is that it combines some of the key features of a limited company with those of the traditional partnership. The LLP must have at least 2 members and there is no upper limit. It is also possible for a company to be a member of an LLP. Where this is the case they are known as corporate members. Profits made by the business are distributed to members. The exact split is detailed in the members agreement which is a private document that lays out key details regarding the LLP.
Formation Of A LLP
The process to form a LLP is very similar to that of the limited company in fact many of the steps and rules are the same:
- Choose a name – There are rules in place at Companies House to ensure your business name isn’t too similar to another company.
- Registered address – The LLP will need to have a registered address which will be on public record at Companies House.
- Register the LLP – You will need to register the LLP at Companies House which can be done yourself using approved software or via a formation agent.
As the name suggests the limited liability partnership offers it’s members limited liability. The LLP itself is considered a separate legal entity to it’s members and as such the members are only liable for a pre determined amount which should be detailed in the LLP’s members agreement. If the LLP was to ever run into financial difficulty then the members personal assets would be some what secure compared to those operating via the traditional partnership route where the partners are personally liable for the partnerships debts and any legal claims made against the partnership.
This is a valuable feature to those who have always operated under the traditional partnership model where traditionally the partners have been wholly liable for the businesses debts and any legal action taken against the business. This is why you will see many professional firms such as accountancy and law practices now operating under the newer LLP structure so that partners can enjoy a degree of protection from both legal action and the misconduct of other partners in the firm.
What Is A LLP Company's Members Agreement
Although the members agreement doesn’t actually need to be filed at Companies House it is still important that every LLP creates one. The LLP members agreement should be agreed on between members and should detail information about how the LLP will operate but should certainly include:
- How profits are shared among members
- Who needs to agree decisions
- Members responsibilities
- How members can join or leave the LLP
Designated Member V Normal Member
We have already mentioned that a LLP needs to have at least 2 members at all times and that as well as individual members there can also be corporate members (where ltd companies are named as members). The LLP must also have a minimum of 2 designated members who can be either individuals or corporate members. So where the LLP has only 2 members these will automatically be the designated members. Where a LLP has more than 2 members the members must decide between them who will be the designated members. Of course 2 is only the minimum so you could have a LLP with 10 members and all 10 also act as designated members or a LLP with 10 members and only 2 are designated members.
Having members instead of shareholders is what is a LLP company’s key differentiator when compared to a limited company.
Designated Member Responsibilities
Every single member is responsible for carrying out their duties and meeting the legal requirements set out in the members agreement. Each member would also need to register for self assessment as the distributions from the LLP will be taxed under income tax rules (we will look at this later in the article) but what is a LLP company’s designated member(s) responsible for? Those elected as designated members will have a number of additional responsibilities to consider. These are:
- Register the business for self-assessment (as well as themselves)
- Register the LLP for VAT if necessary (Check out our article VAT Rates Registration & Reporting)
- Appoint an auditor where needed
- Keep accounting records
- Prepare, sign and send annual accounts to Companies House
- Send a confirmation statement (previously an annual return) to Companies House
- Tell Companies House about any changes to the LLP such as a change of address or removal of a member.
- Act for the LLP if it’s wound up or dissolved
Tax For LLP's
So what is a LLP company’s tax position? Well the LLP itself will need to register for self assessment to declare profits to HMRC this is as well as the members registering for their own self assessments if they weren’t already. Although the LLP will be declaring profits to HMRC it won’t actually be liable to pay any tax. It is the individual members who will be liable to pay the tax on their split of the profits. This is the same tax setup you would have in a traditional partnership
Profits received by members will be subject to normal income tax rules except in the case of corporate members who we will look at below.
What Is A LLP Company's Corporate Member
A company can also be a member of a LLP. This is useful in a number of situations and can provide a number of benefits. Firstly this could allow an individual to start an LLP which wouldn’t otherwise be possible without a corporate member. The individual would be acting as one member and they could form a limited company to act as the other member allowing them to meet the 2 member minimum requirement. All profits would still be distributed to the same individual either directly or via their limited company. This situation is rare as most individuals would just opt for a limited company rather than having to operate a LTD and a LLP but for a sole proprietor who plans to add partners in the future it would give them a great deal of flexibility.
Profits distributed to corporate members would then be subject to corporation tax and held by the company until the directors choose to distribute them. The profit could be distributed as a salary or dividends but usually a mix of both to be as tax efficient as possible. There is no need for a corporate member to register for self assessment as their distributions will be taxed under corporation tax rules. This ability to time distributions and mix the way distributions are made often attracts members who want to reduce their tax bill via effective tax planning.
History Of The LLP
The LLP was first available in the UK on 6th April 2001 after the limited liability partnerships act 2000 came into force but the LLP was actually available in the United States prior to this with some states passing legislation as early as 1991. It was the financial crisis during the late 80’s and early 90’s that prompted the introduction of a new type of company. At the time many accountancy and legal firms were facing collapse after signing off audit reports for a large number of building societies and savings firms who were later declared insolvent. The US government then went after the accountancy practices and law firms who acted for these now collapsed institutions. Although it was often considered the result of one partners misconduct, the way these traditional partnerships were setup meant that all partners in a firm were held liable and their personal assets could be used to repay millions in compensation . After the successful roll out in the US, big accountancy firms in the UK began to appeal to the UK government that similar measures were introduced here and in the early 2000’s their request was granted.
Is The LLP Just For Professional Firms?
Although this article and others may highlight the LLP’s popularity amongst professional practices such as accountancy and law firms the setup is available to any business that meets the member requirements. The main reason the LLP has proven so popular amongst professional firms is of course the addition of limited liability to partners but remember this limited liability is also available via a limited company. The secondary reason businesses tend to choose a LLP setup is the ease with which partners can be added and removed which is a far more complicated process with a limited company. So if your business values these features then the LLP may well be the right choice for you and your partners. Of course it is advisable that you speak to an accountant prior to making a decision as it’s better to get this right from the start.
We hope this article has helped you to understand what is a LLP company in more detail.