A Limited Liability Partnership (LLP) is a relatively new and unique form of legal entity in the United Kingdom. It has gained popularity as an alternative corporate vehicle suitable for most types of business or professional activities.
LLPs were introduced as a legal form of registered business entity by the Limited Liability Partnerships Act 2000 (effective from April 2001). This kind of legal entity is largely governed by the Companies Act 2006, since many of the requirements are the same for both companies and LLPs. An LLP should not be confused with a “classic” partnership (also known as a general partnership) or Limited Partnership (LP).
What is a Limited Liability Partnership?
A limited liability partnership (LLP) is a corporate body with a legal personality separate from that of its members. It is formed by incorporation, which is to say registration, under the LLP Act 2000 which has already been mentioned above.
An LLP has features of both a limited company and a partnership.
Like a limited company, the LLP is: – 1. owned by its members, – 2. operates as a separate legal entity and – 3. provides its members with the advantages of limited liability.
An LLP is liable for its own obligations, whereas the members’ liability is limited to the amount of their contributions made to the LLP’s capital. Members of an LLP may become liable for the LLP’s debts only in some instances within an LLP’s insolvency procedures.
Like a partnership, an LLP can be managed directly by the partners of whom it is composed and does not need directors or chief executives to be appointed. By “partnership”, we mean here the association of two or more people formed for the purposes of profit and governed by the Partnership Act 1890.
Another difference between LLPs and companies concerns taxation. An LLP does not pay corporation tax by itself, but its members are subject to tax in respect of the income attributable to them as a result of participation in the LLP.
In other respects, an LLP is very close to an ordinary private limited company.
An LLP, as a business entity, has unlimited capacity. It can carry on any lawful business with a view to profit, which may include normal commercial activities, such as trade in goods, as well as professional services, such as law or accountancy. It is worth noting that LLPs are not intended for not-for-profit or charitable activities.
How to register a Limited Liability Partnership
You can register an LLP by means of paper or electronic filing of the relevant application with Companies House and paying a standard registration fee. Today most applications are submitted electronically. If you want to register an LLP then you may undertake on your own all of the steps that are required or, alternatively, you can apply through a company formation agent or else a solicitor.
To complete the registration form, you should specify the following information:
- The name of the LLP. The partnership’s name must contain the ending “LLP” or “Limited Liability Partnership” and, as with a Limited Company, it must not copy the name of an existing partnership or company and it must not be sensitive or offensive.
- The part of the UK where the registered office will be situated (England and Wales, Wales, Scotland or Northern Ireland).
- The registered office address.
- Details of all members and designated members.
- Details of persons with significant control (PSCs).
- A statement of compliance.
Each person who is proposed in the application as a member, or designated member, must consent to act in that capacity. Each person named as a PSC in relation to the LLP must know that their particulars are being supplied on the application form.
Upon incorporation, the partnership receives a Certificate of Incorporation, which states the full name and registration number of the partnership, the date of incorporation and the part of the United Kingdom in which the LLP’s registered office is situated.
The information on the LLP that will be publicly available on the Companies House website will include:
- The LLP’s name.
- The registered office address.
- The LLP’s number and date of incorporation.
- Filing history and deadlines (with the downloadable documents).
- All active and resigned officers (members) and people with significant control with the date of birth, date of appointment, country of residence and correspondence address of each of them.
Partners in an LLP are called “members”. The members of an LLP are not equivalent to “shareholders” in terms of company law and their interest in the partnership does not constitute “shares”.
Each member undertakes to make a contribution to the partnership, the amount of which corresponds to that member’s participation rights in the LLP. There are no minimum requirements for capital contributed.
A Limited Liability Partnership must have at least 2 members, who may be individuals or legal entities of any nationality or residence. New members can also join the partnership at any time after incorporation. There is no limit to how many members an LLP may have.
An LLP must notify Companies House of any change to its membership (for example the appointment of a new member or termination of the appointment of an existing member) or changes in the members’ details (such as name, service address or country of residence) within 14 days from the date of the change.
LLP designated members
Designated members have the same rights as any other members of the LLP, but they are also responsible for the LLP’s statutory compliance. The designated members are therefore responsible for:
- Submission of the annual confirmation statement and the annual accounts to Companies House in due time.
- Notifying Companies House of any changes in the LLP (for example, its name, nature of business, registered office address, accounting reference date, members’ or PSCs’ details) within 14 days from the date of the change.
- Keeping accounting records.
- Maintaining the register of members and PSC register.
- Appointment of an auditor (where required).
- Registering the LLP for self-assessment and delivering a partnership tax return to HMRC.
- Registering the LLP for VAT (where required) and ensuring that VAT returns are submitted and VAT paid to HMRC in a timely fashion.
- Acting on behalf of the LLP in the course of its dissolution or insolvency proceedings.
Each LLP must have at least 2 duly appointed designated members. If an LLP has only two members, then all of them are deemed designated members. Under the members’ agreement, any member may at any time become or cease to be a designated member provided that after the change, the number of designated members remains adequate.
People with Significant Control
A register must be maintained of an LLP’s “persons with significant control” (PSCs), whose information must be supplied to Companies House. The information about PSCs is publicly accessible on the Companies House website.
In relation to a Limited Liability Partnership, a PSC is an individual who meets any one or more of the following conditions:
- Directly or indirectly holds rights over more than 25% of the surplus assets in the event of a winding up.
- Directly or indirectly holds more than 25% of the voting rights.
- Directly or indirectly holds the right to appoint or remove the majority of those involved in management of the LLP.
- Otherwise has the right to exercise, or in effect to exercise, significant influence or control.
- Holds the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm which is not a legal entity but would itself satisfy any of the first four conditions if it were an individual.
An LLP has no directors and secretaries. Management responsibilities in the LLP are usually distributed between its members. The LLP may appoint one of its members or employ another person to act as a manager or a chief executive officer, considering the size of the business and the model of management that is chosen.
Unlike a company, an LLP has no Articles of Association. The LLP’s internal procedures and relationships between its members can be governed by a limited liability partnership agreement, also known as members’ agreement. This agreement is an option, not a requirement, and is an entirely private document between its members that does not need to be submitted to Companies House.
An LLP agreement may, among other things, cover matters such as:
- The LLP’s business objectives.
- Each member’s details, powers and responsibilities.
- Decision-making procedures.
- Members’ contributions.
- Financing and distribution policies.
- Members’ profit entitlements.
- Introduction of new members or expulsion of the existing ones.
- Members in charge of the management of the LLP’s business affairs.
- Cases in which the LLP is to be discontinued.
- Indemnification and other legal and financial matters.
In the absence of an LLP agreement, the general rules for the LLP are determined by the default provisions of the Limited Liability Partnerships Regulations 2001. In particular, Regulations 7 and 8 provide that:
- All the members are entitled to share equally in the capital and profits of the LLP.
- Every member may take part in the management of the LLP.
- No person may be introduced as a member or voluntarily assign an interest in the LLP without the consent of all existing members.
- No change may be made in the nature of the business of the LLP without the consent of all of its members.
- If a member, without the consent of the LLP, carries on any business of the same nature as that of the LLP and that competes with it then he must account for and pay over to the LLP all profits made by him in that business.
- No majority of the members can expel any member unless a power to do so has been conferred by express agreement between the members.
If the partners who are establishing an LLP consider it undesirable to follow any of the foregoing rules then it is recommended that they draw up an LLP agreement which, being a legally binding document, will modify the default provisions and settle other relevant matters. Such an agreement that is signed before starting a business can help avoid disputes and misunderstandings between the members and secure the interests of each of them.
Accounts and audit
LLPs must keep accounting records and also prepare and submit annual accounts in respect of each financial year.
The LLP’s accounting records must be sufficient to:
- Show and explain the LLP’s transactions.
- Disclose with reasonable accuracy, at any time, the financial position of the LLP.
- Enable the members to ensure that any accounts comply with the statutory requirements.
An LLP must keep its accounting records at its registered office, or such other place as the members think fit. The accounting records must at all times be open to inspection by all members of the LLP.
An LLP must preserve its accounting records for 3 years from the date on which they are made.
The annual accounts must be prepared in compliance with the UK GAAP (Generally Accepted Accounting Principles) or IAS (International Accounting Standards). The duty of an LLP to prepare and file accounts is imposed upon its designated members. An LLP’s annual accounts must be approved by the members and signed by a designated member.
Small and dormant LLPs are required to report fewer disclosures in their accounts (abbreviated accounts) than medium or large LLPs. An LLP qualifies as small if it satisfies two or more of the following conditions in a financial year:
- Turnover of no more than £10.2 million.
- Balance sheet total of no more than £5.1 million.
- Fewer than 50 employees.
An LLP’s annual accounts for a financial year must be audited unless the LLP is exempt from audit and has exercised the right to such exemption. An LLP that qualifies as small or dormant in relation to a financial year is exempt from the audit requirements.
The specific ways in which the rules of the Companies Act regarding annual accounts and auditing apply to LLPs are laid out in the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008.
LLPs are not subject to corporation tax since they are treated as partnerships for tax purposes. This means that an LLP is a “transparent” structure and is not considered a single taxpayer, but its profit is taxed on the level of its members.
The members of an LLP are subject to tax in respect to the proportion of the LLP’s profits to which they are entitled (regardless of whether the profit was actually distributed to the members). While corporate members of an LLP pay their corporation tax, the individual members are taxed as self-employed individuals.
If an LLP receives all of its profits from sources outside the UK, and all of the LLP members are non-UK residents, then these profits will not be subject to tax in the UK. Each member of the LLP will be liable to tax under the rules of their country of tax residence.
Allmembers of an LLP. Whatever their country of residency, must be registered with Her Majesty’s Revenue and Customs (HMRC) and file their Self-Assessment Tax Returns in respect of the profit that corresponds to their interest in the LLP. The members resident in the UK must pay National Insurance and Income Tax on their earnings from the LLP.
For the purposes of Value Added Tax (VAT) an LLP is an independent taxpayer. Like a Limited Company, an LLP must be registered for VAT if its VAT-taxable turnover exceeds the threshold of £85,000 in a given tax year (e.g. for the tax year 2021/22).
The benefits of a Limited Liability Partnership
To summarize, here are the main benefits of limited liability partnerships.
- An LLP is suitable for any business activities with a view to profit and is ideal for partners joined to practice a profession.
- Separate legal personality together with the limited liability of its members.
- An LLP’s management is carried out directly by the members and can be structured at their own discretion.
- The internal rules of an LLP can be documented in the LLP agreement, which is private and confidential.
- The annual reporting requirements are very similar to those of private limited companies.
- Tax transparency: the LLP’s profits are taxed on the level of its members.
The LLP has become increasingly popular in recent years as it offers a good balance between the flexibility of a partnership and the legal certainty of a limited company. It is particularly well suited to businesses that are carried out by professionals, such as accountants, lawyers, and consultants.
Limited liability partnerships offer a number of benefits for business owners, including limited liability for members, freedom in management and structure, and tax transparency. If you are considering forming a partnership, these benefits should help you make the decision to switch. Let us know if we can help you get started.