Limited Liability Partnerships: The Pros and Cons

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For those in the early stages of establishing a new business in the UK there are many decisions to make, including – among many others – deciding on the name of the business, the type of business and its structure. Each of these decisions will play a key role in the success of the new venture. Although changes can be made later it is always better to start on a firm footing. We will take a comprehensive look, below, at the advantages of limited liability partnerships and also the disadvantages of this type of business.

What is a limited liability partnership (LLP)?

An LLP is a type of business structure that is incorporated by registration at Companies House, whereby the liability of its members (i.e. partners) is limited to however much they have personally invested. As with a limited company the LLP business itself owns the assets and is liable for its debts. The members of the LLP act, in effect, as agents of the business.

LLPs are often (but not exclusively) established for professional services businesses, whereby each partner has a separate stake but they all operate under a common business entity. Examples of professionals who may enter into an LLP include accountants, architects and lawyers.

Under section 1(2) of the Limited Liability Partnerships Act 2002 (LLPA 2000) an LLP is a body corporate, i.e. a corporation. A body corporate is defined as a body of persons which is treated in law as having its own “personality” which is distinct – i.e. separate – from those of its individual members.

This section of the LLPA 2002 stipulates:

“A limited liability partnership is a body corporate (with legal personality separate from that of its members) which is formed by being incorporated under this Act; and—

  1. in the following provisions of this Act (except in the phrase “overseas limited liability partnership”), and
  2. in any other enactment (except where provision is made to the contrary or the context otherwise requires), references to a limited liability partnership are to such a body corporate.
    references to a limited liability partnership are to such a body corporate”.

What are the advantages of limited liability partnerships?

There are several advantages of limited liability partnerships, especially when compared with a traditional partnerships, these being as follows:

  • An LLP is a legal entity separate from its members.
  • An LLP has unlimited capacity under section 13 of LLPA 2002. This means that it can do anything which a legal person can do, including hold property, enter into contractual arrangements and sue.
  • The liability of an LLP’s members is limited to however much money they have put into the business. Any debts owed by the LLP are the responsibility of the business, not of its individual partners. There are some possible exceptions to this (explained in the disadvantages below).
  • LLPs may be more tax-efficient (explained in more detail below).
  • LLP partners enjoy the same degree of organisational flexibility as a partnership. This means that members are free to agree:
    • how they share profits made by the LLP
    • who is responsible for the management of the LLP
    • how decisions are made for the LLP
    • when new members are appointed to the LLP
    • how new members should be appointed, and
    • the rules on the retirement of members.
  • LLP agreements are confidential to the partners as there is no requirement for this document to be filed publicly.
  • LLPs have no share capital. This means that there are no capital maintenance requirements and there is no legal obligation for partners to contribute to the capital of the LLP unless this is agreed separately.
  • The LLP business name is protected since it is registered with Companies House. This is impossible with a traditional partnership, so this is yet another of the benefits of an LLP.

The ability to create floating charges

One of the lesser understood benefits of an LLP is the ability to create greater levels of security over its property and assets by creating floating charges. This is extremely useful when seeking capital. Since regular partnerships have no separate legal identity they cannot grant a floating charge over assets. The ability to create a floating charge is advantageous for LLPs because assets can be purchased and sold without reference to the chargeholder (i.e. typically the lender who loaned money to purchase an asset). If an LLP chooses to create a floating charge over its assets then this crystallises (or converts into a fixed charge) if there is a default or similar type of event. If this occurs, the chargeholder may then appoint an administrative receiver or administrator.

Tax benefits of an LLP

Another of the advantages of limited liability partnerships is that profits are the personal income of each member. This means that double taxation can be avoided. Double taxation can occur under a limited company structure because the company pays corporation tax on the profits earned and shareholders and directors pay further taxes on the dividends and salaries that they receive from the company.

Collective investment schemes (CIS)

An LLP can register as a collective investment scheme (CIS) in accordance with section 235 of the Financial Services and Markets Act 2000 (FSMA), but only if the LLP is an arrangement regarding property, with the intention being to allow participants to receive profits or income out of the property, and either the participants’ contributions and their profits or income are pooled or the property is managed as a whole.

What are the disadvantages of an LLP?

There are some disadvantages or limitations of LLPs that potential partners should consider before entering into such an arrangement. These include:

  • Unlike a traditional partnership, LLPs must publicly disclose their interests by submitting financial accounts annually to Companies House. This means that the personal income of partners will be made public, even if they would rather that this not be so.
  • LLPs have higher overall administration costs compared with traditional partnerships.
  • Higher set up costs compared with a traditional partnership.
  • Some professional bodies may not permit their members to operate under an LLP. It is recommended that one check whether any such limitation is imposed by your own professional body).
  • LLP partners may need to contribute to the liabilities of the business in particular circumstances, including those in which:
    • they are found guilty of misfeasance;
    • they fall within the special clawback provisions contained in the Insolvency Act 1986, or:
    • there is an agreement between the members to make a contribution to the liabilities of the LLP.
  • Profits cannot be held over for future tax periods, as may be done with companies limited by shares.
  • Private residential addresses of members may be listed with Companies House. Many a partner now uses a “service address” instead of their private residential address to avoid the latter being publicly available. This may not be the case if you have previously registered a residential address and have not asked for this to be suppressed.

LLP Reporting requirements

An LLP must meet strict reporting requirements in the same way as a limited company and keep accounting records whether it is trading or not. The filing requirements for an LLP include:

  • Individual accounts must be filed for each member of the LLP, including a profit and loss account (or income and expenditure account if the LLP is not trading for profit), a balance sheet, notes to the accounts and an auditors’ report.
  • Group accounts.
  • VAT returns.
  • Self-assessment forms for HMRC.
  • Register for and operate PAYE, if required.
  • Confirmation Statement at Companies House – This includes the LLP business name, the registered office address, the address where statutory registers are kept, details of each LLP member, whether any members are designated, the details of persons with significant control (PSCs) and the Standard Industrial Classification (SIC) code/s of the LLP.
  • Maintaining LLP registers – This includes the register of LLP members, the register of LLP members’ usual residential addresses and the register of people with significant control (PSC register).
  • Reporting LLP changes to Companies House – This includes changes to the LLP name, the SAIL address (Single Alternative Inspection Location) and the Accounting Reference Date (ARD).

Final words

As we have described above, there are many benefits of an LLP but there are also several drawbacks to consider. Before you register your business as an LLP it is advisable to discuss your plans with a specialist in company formations and company law. Based on your current and future needs they can explain the options available to you and whether an LLP will be in your best overall interests and those of all of the partners. Should you do choose to proceed as an LLP then they can also ensure that the required foundation documents are drafted for your needs and are registered (including the LLP agreement), that your business is properly set up and that you understand the statutory filing and taxation requirements and the limitations on LLP names. By ensuring that your new LLP is established on a firm footing from the outset you can help ensure the success of your venture and the protection of the partners.

Uniwide Formations specialise in registering Limited Liability Partnerships and Limited Companies and offer wide ranging related services and advice.

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