Ultimate Guide to Limited Liability Partnerships (LLPs)

Ryan Patrick

• 9 min read
Ultimate Guide to Limited Liability Partnerships (LLPs).

If you are a business owner, entrepreneur, or professional in the UK, understanding several business structures is crucial to making better-informed business decisions. Limited Liability Partnership is one of the legal business structures that you can form and run within the UK. Often referred to as LLP, the business structure combines the features of a general partnership and a limited Company.

This guide will therefore explain all you need to know about LLPs including the meaning, formation procedures, benefits of forming one, LLP agreement, and many more.

What are Limited Liability Partnerships?

A Limited Liability Partnership is a separate legal entity involving two or more members coming together to achieve the goal of the business. LLPs are a unique business structure that combines the features of the traditional partnership and a Limited Liability Company.

Thus, LLP is a business structure that allows members or partners to enjoy a limited liability. With that partners in a Limited Liability partnership aren’t solely responsible for the debt and liability in which the business incurs. However, the business remains a separate legal entity and thus pays off debt in its name. This is usually a great advantage to LLP members as their personal assets and savings are protected.

LLPs are now common among professions that usually operate as partnerships including medical practitioners, accountants, consultants, dentists, solicitors, etc. Although LLPs must contain two members, there are no restrictions on the number of members that can join after formation.

LLPs are known for their profit-making structure and thus a business cannot set up an LLP for charity's sake. It shares some major characteristics with the traditional partnership in terms of the internal management structure, tax returns and liability, distribution of profits, and many more. LLP are formed through registration with the Company House and can only be dissolved following the proper filings with the authority.

Traditional Partnership vs. Limited Liability Partnerships

Limited Liability Partnerships were enacted in the year 2001 following the LLP Act 2000 as an alternative business structure to the traditional partnership. While LLP and traditional or normal Partnerships share some similarities, they also have some differences.

Similarities

  • Both the LLP and traditional partnership require two or more business members that come together legally to make profits.
  • In both business structures, partners are taxed as self-employed individuals rather than the business being taxed as a Corporation.
  • Both have a flexible internal management structure.

Differences

  • LLPs are seen as separate legal entities and can therefore enter into contracts with other businesses or individuals in their name, sue or be sued, and can also be held responsible for their debt.
  • LLP members have a Limited Liability. This means that members can only pay off debts according to what they invest or contribute to the LLP. Their personal savings and properties aren’t part of the business and cannot be used to settle the business debts. In a traditional partnership, the opposite is usually the case as the partner's assets and properties are not protected from the company’s debt.
  • LLP incorporation status gives them more credibility and reputation than the traditional partnership. LLPs require more annual filings, goes through more rules and regulations and more so have their records available to the public. All of these help the LLPs build more trust and transparency with the public and stakeholders in general.

LLP vs. Limited Company

LLP and Limited Company have some similar characteristics and some differences. First, both the LLP and Limited Company have to be registered at the Company House during their formation. Both require some annual filings and reporting that must be done. Apart from that, they have their information in the Companies register that could be inspected by the public at any time.

However, some of the difference between them is that while an individual can form a limited company and also be a director of the company in a limited company, LLP requires two partners for it to be formed and they do not require a director.

Secondly, the liability of members in Limited companies is according to the value of shares they have in the company. However, for LLP, liability is according to what they have in the partnership agreement.

LLPs have the Article of Association which could be inspected by the public through the Companies Register, however, LLPs use the partnership agreement which is private to them and can be altered at any time without the consent of the Companies House.

Also, Limited companies can be taxed as Corporations meaning the company itself can be taxed on the profit made. However LLP members are only taxed individually, that is each partner’s income is taxed and not the LLP itself.

Benefits Associated with Forming an LLP

Here are the benefits that are associated with setting up an LLP.

1. Limited Liability Protection

The most pertinent benefit that comes with LLP is the limited liability protection that the partners have. Since LLP is recognized as a separate legal business, any liability or debt that the business incurs will be cleared in the business name. So, members are not personally held responsible in such situations and their assets are thus protected. For the traditional partnership, the reverse is the case as member’s assets are not protected.

Just like it applies to the LLC, if an LLP incurs debt because of the negligence or fraudulent act by its members, then it can be personally held responsible for the loss.

2. Flexible Organizational management

Another important advantage of LLPs is the flexibility in their management and organization. Unlike general partnerships in which partners have equal rights and responsibilities, LLPs maintain some flexibility in terms of ownership, management, profit distribution, decision-making procedures, appointment and removal of members, and so on.

3. Self-Employed Tax Treatment

LLPs are taxed as self-employed, meaning individual member's income is being taxed rather than the LLPs themselves. With this double taxation can be avoided. When Limited Companies are taxed as Corporations, the company itself will be taxed before the individual shareholder's income is taxed. In LLPs, this can be avoided as members are only taxed and not the business itself.

4. Unique LLP name

Upon setting up an LLP with the Companies House, your LLP name remains unique to your business and cannot be used by another company or LLP. There are even regulations that ensure that no company uses a similar name to yours. This isn’t always the case with general or traditional partnerships as their names aren’t usually thoroughly protected.

5. Easy to Start

Setting up an LLP in the UK is quite easy, straightforward, and price-friendly. To set up an LLC, you complete the required form with the Companies House. You will be required to provide the LLP name, a registered office address, and details of LLP partners. Once you make your complete application, you’ll be able to set up within 3 to 6 working hours.

6. Maintains some Level of Confidentiality

Although LLP just like the LLC are always being subjected to more public disclosure including the annual filings. However, LLP still enjoys confidentiality to some extent in terms of their internal organization and management.

When an LLC is formed, the Article of Association is made available in the Companies House register, whereas the rules, regulations, agreements, and arrangements within the LLP are kept private.

7. Higher reputation and Credibility

LLP cannot be compared to the general partnership when it comes to reputation and credibility. Because LLP goes through more legal paperwork, annual filings, thorough registration, and many more, this gives it a more upper hand when it comes to reputation and credibility. It is even easier for the public, suppliers, lenders, and customers to trust the LLP because some LLP information is easily accessible through the company register.

Drawbacks Associated with Forming an LLP

Here are the drawbacks of forming an LLP

1. More Filing and Reporting Requirements

LLPs have more reputation and credibility when compared to the traditional partnership. However, they go through more paperwork like annual filings and reporting, registration that makes them credible.

2. Higher Setup and administration Cost

When compared to the general partnerships, LLPs can be pricier to set up. Apart from that, the administrative costs associated with LLP are more expensive than general partnerships.

LLP Agreement

While it is not compulsory to file the LLP Agreement with the Companies House during formation, it is important to have this document as an LLP. An LLP agreement is a document showing the conduct, duties, rules, and regulations concerning the LLP. It provides a legal framework that guides the smooth running of the LLP and the partner's conduct. It helps partners maintain a good standing and helps avoid disputes or conflicts.

There is no special way in which the Agreement should be designed, however, it must be created with the consent of every member. Information in the LLP agreement can be changed or altered at any time but it must be done with all members’ awareness. Some of the details of this document are:

  • LLP name and registered office address
  • Detail of all partners
  • Details about People with Significant Control
  • Capital contribution processes
  • Business operations to be carried out
  • Liability management strategy
  • Insurance and its policies
  • Information about the designated members and their duties
  • Terms and Conditions for profit and loss sharing
  • Rights and responsibilities of each member.
  • Conflict and Dispute Resolution Policy
  • Procedures for accepting new members

How to Set Up an LLP in the UK

Setting up an LLP in the UK is quite an easy process.

First, you would need to select a unique LLP name. You would need to ensure that it conforms to the Companies House naming requirement.

Next, you would need to make the application with the Companies House. You would be required to provide information like registered office address, member's details (name and address), designated member's details, statement of compliance, and so on.

Once you are done providing the necessary details, you can submit the application and wait for approval. Usually, this could take 3 to 6 working hours. Once it is approved, you’ll be emailed copies of the incorporation document.

Who can be an LLP Member?

An LLP member can be an individual or a corporate organization like a firm, or LLC. Usually, an LLP must be formed with two persons containing at least one human. Thus a corporate body alone cannot form an LLP. Anyone can be a partner of an LLP or join an LLP later after formation so far they meet the below criteria.

  • Should not be under the age of 16
  • Should not be a disqualified director
  • Must not be an undischarged bankrupt.
  • Must not be subjected to special UK government restrictions
  • Shouldn’t be restricted by any court order.

What are Designated Members?

During LLP incorporation, members would be required to provide at least two partners who will be the designated members. Designated members are individuals who are responsible for taking up more administrative and managerial activities of the LLP. Some of their duties include:

  • Registering partners for Self-Assessment, and VAT when necessary.
  • Filing annual account and Confirmation statement.
  • Keeping accounting records
  • Notifying Companies House of changes made.
  • Appointing an accountant and auditor
  • Ensuring other members carry out their responsibilities and duties.
  • Keeping the statutory register.
  • Representing the LLP in official meetings, proceedings, and so on.

Usually, two members must be provided to be designated members, if no designated member is provided, every partner is considered as designated by law.

Does an LLP require a Registered Office Address?

Yes an LLP does require a registered office address. This must be provided during the Incorporation process and must be maintained as long as the business still exists.

The registered office usually is a physical address located where the business is formed and it is coupled with receiving legal notices, and documents from the Companies House and other authorities. A registered office address must contain a full postal address. Although this address can be changed, the new address must also be within the jurisdiction where the LLP is formed and the Companies House must also be notified within 14 days after the change was made.

Form your company with Incorpuk today

At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.

Frequently Asked Questions

Who can form an LLP?

Two or more individual or corporate organizations (firms, businesses, etc.) can form an LLP. However, an LLP must contain at least one human before it can be set up and must meet other certain requirements.

Is an LLP Agreement needed during LLP formation?

No, an LLP Agreement is not a major requirement in LLP formation, that is, it is not required to be submitted at the Companies House. It is however a recommended document that can be prepared by partners during or after LLP formation.

Does an LLP need to prepare an Annual Report?

Yes an LLP must prepare and submit annual reports and confirmation statements and submit to the registrar of Companies as required.

What happens if a partner becomes insolvent?

When a partner in an LLP becomes insolvent, he or she is restricted from partaking in the management of the LLP. Furthermore, he or she will be barred from being a member.

Conclusion

LLPs are a flexible business structure that combines the features of partnerships and Limited Companies. While it is quite easy to set up one, it is worth understanding the business structure and how it works before setting up one.