Limited Company (LTD) vs. Limited Liability Partnership (LLP): What’s the Difference?

Ryan Patrick

• 8 min read
Limited Company (LTD) vs. Limited Liability Partnership (LLP): What’s the Difference?

If you are preparing to start a business within the UK, one of the key decisions you’ll need to make is to choose the company's legal structure. While there are several business legal structures you can choose to set up, limited company and limited liability partnership remains one of the most popular within the UK.

As you’d expect, each of these business structures has some unique characteristics and advantages. The choice of which to pick depends on a varying factor including, tax structure, management and organization structure, limited liability option, business goals, etc. While there are some similarities between a limited company and a limited liability partnership, it is important you know that they are different business structures.

This guide will therefore explain the differences between the two legal structures, including their similarities, and advantages of starting them

What is a Limited Company?

A limited company is a business structure in which the company is recognized as a separate legal entity and can therefore sue another company and also be sued in its name. As such a limited company is distinct from its owners and directors and any debt incurred from the business is liable to be paid by the company itself and not the shareholders. Thus shareholders’ and members' assets are protected against any liability incurred from the company.

A limited company can be formed by one shareholder or more and the formation process is done at the UK Companies House. While shareholders are the owners of the business in a limited company, they do appoint the director who helps in the daily running of the business. Importantly, a shareholder within a limited company can also be the director, meaning the individual can be the owner of the business and still manage the day-to-day affairs of the company. Even when a limited company has only one shareholder who is still the director, the company remains a separate legal entity.

Limited companies within the UK are regulated by the Companies Act 2006 and the Company’s Articles of Association. They must therefore comply with the rules of the Companies House, make adequate filings, and provide their information to the public register for the public to see.

Advantages of Forming a Limited Company

Forming a limited company comes with many advantages, here are some of them you should understand.

A limited company has a separate legal entity and can enter into a contract in its name and not that of the shareholders or directors. Different individuals also join the company as shareholders by allotment of shares. As such ownership of the business is not limited to those present when the company is formed. In the event that a member or director dies or retires from the business, a limited company would still exist, sell more shares, and appoint directors as required.

Since a limited company is identified as a separate legal entity, it can only be dissolved or liquidated legally through the Companies House.

2. Tax Benefits

Limited companies within the UK enjoy more tax benefits than a sole trader or an LLP. While an LLP can be taxed as a corporation, meaning the company itself is taxed as a corporate body rather than as individuals, an LLP or a sole trader is taxed individually. Basically, 19%-25% Corporation tax is applied to Limited companies, however, LLP is charged 20%-45%.

3. Limited liability

As a shareholder of a limited company, you have control over the liability that’s incurred. The limited liability benefits are one good reason why most businesses form a limited company. Since this type of business structure has been regarded as a separate legal entity, the liabilities incurred from the business are settled by the company itself and not the shareholders.

Shareholder's personal properties and assets are thus protected in case the business runs into debts in the future. We could therefore say that a member's liabilities within a limited company are limited to the number and value of shares and not their own assets.

Once shareholders and directors within the limited company can follow the necessary regulations, and avoid fraudulent and mismanagement of company funds, they can be sure to enjoy the limited liability opportunity for a long time.

4. Capital is easily raised

With a limited company, capital can easily be raised through the issuing of new shares. An LLP or single-owner business is expected to raise the capital for the business itself or seek funds from outside of the business. Whereas in a limited company, new shareholders could be allowed to join the company and funds could be raised through shares.

Importantly, the limited company could decide to issue one or more classes of shares to allow flexibility. With that, shareholders could understand their type of shares, the rights and power that they have within the company, and the extent to which they can have control over the company.

5. High Credibility

Talking about the most credible business structure in the UK, a limited company is one of them. The business structure is legally recognized. Moreover, Limited companies go through a lot of annual filings, and more paperwork that makes it more credible. Apart from that limited company information is readily available to the public to see anytime making it easier for the public to develop trust with the company.

What is a Limited Liability Partnership?

A limited liability partnership is a separate legal business structure that is formed with two or more partners. It is also referred to as LLP and it involves two or more individuals coming together to achieve the aim of a business. The business structure was first introduced in the year 2001 following the LLP Act 2000.

It maintains a hybrid business structure in the sense that it combines the features and some advantages of both a traditional partnership and a limited liability company. So in LLP, partners also enjoy a limited liability, in that the business liability and debt incurred by the business is settled by the business and not the owners. Partners’ assets and properties in an LLP are thus protected.

Over the years. LLP business structures have been used by professions that operate as partnerships. Some of these are dentists, architects, solicitors, accountants, etc. Just like the limited company, LLP is also formed with the Companies House in the UK and can also be dissolved through the right authority.

Advantages of Forming an LLP

Below are the advantages of forming an LLP.

1. Limited Liability

Limited liability partnerships also enjoy a limited liability just like the limited company. As such partners are not personally responsible for the debts incurred by the business. Partners thus can be rest assured that their assets are protected even if the business faces debts.

2. Easy to Form

Forming an LLP doesn’t take long or much process. Once you have all the required details and documents at hand, an LLP can be formed within some hours. Generally, you’ll be required to fill out the formation form. Also, you will have to provide an LLP name, registered business address, and information about the LLP members before you can submit your application.

3. Confidentiality

LLP, unlike limited companies, still maintains some level of confidentiality. While both business structures still go through registration and annual filings with the Companies House, the LLP agreement is still kept private with the LLP. This is not the case in a limited company as the article of association is made public through the Companies House register.

4. Credibility

To a great extent, an LLP maintains more credibility than traditional partnerships. The business structure offers more legal protection that enables it to be recognized as an established business structure. Apart from that LLP goes through paperwork, annual filing, and registration with the Companies House which offers it more credulity.

Similarities between a Limited Company and an LLP

Now that you understand what an LLP and a limited liability company are and the advantages of forming either of them, let’s explore the similarities and differences between them.

  1. First, both business structures are registered with the Companies House in the UK for it to be formed.
  2. They also both go through annual filing and documentation.
  3. Both are considered a separate legal entity and also both have limited liability protection.
  4. Both must also maintain a PSC ( People with Significant Control) register

Differences between a Limited Company and an LLP

Despite that a limited company and a limited liability partnership share some similarities, they still have a lot of differences. Here are some of the differences between the two.

1. Confidentiality

For a limited company, the articles of association are made public through the provision at the Companies House, whereas an LLP agreement is kept private to the business and not available in the Companies register. This means that information contained in the articles of association can easily be accessed by anyone unlike that of an LLP agreement. Thus an LLP can still maintain some level of confidentiality when compared to the other business structure.

2. Organizational structure

Limited companies' organizational affairs are managed according to the Companies Act 2006. With this, members in a limited company must act and manage the organizational structure of the company based on the required regulations and laws. Although there are regulations guiding the affairs of an LLP, partners can still make some decisions, choose how profit is shared, appoint more partners, etc.

3. Tax structure

When we talk about tax structure, LLP and limited company are treated differently. Usually, partners in an LLP are taxed individually, meaning that the business itself is not taxed rather the partners themselves are taxed on an individual basis. With this income tax is applied on an individual's earnings and we could therefore say that they are taxed as self-employed. Limited companies on the other hand are taxed as a separate entity for tax purposes and thus the tax is applied as a corporation. This means that the company itself as a distinct entity pays tax. Apart from that directors and shareholders are also expected to pay income tax on their salaries.

4. Filing and Reporting

Although both business structures are required to go through annual filings and confirmation statements, there is more paperwork, filing, and reporting when it comes to a limited company. Directors within a limited company are tasked with ensuring that the filings and reporting are done adequately as required. Failure to miss out could lead to facing some penalties. For an LLP, designated members are expected to ensure that the reporting, filings, and compliance are done well, though this documentation cannot be compared to a limited liability own.

5. Ownership

While a limited company is owned by the shareholders, an LLP is owned by partners. With just a shareholder, a limited company can be formed and this shareholder can also act as the director of the company. In the case of an LLP, at least two partners are required before it can be formed. Once formed, profits are divided according to the amount each partner invested in the business and requirement of the LLP agreement whereas in a limited company, profits are shared according to the number and values of shares owned by every member.

Should I Form a Limited Company or an LLP?

Both Limited Company and LLP are well-recognized business structures in the UK that offer limited liability. Choosing either of the two should be dependent on your business goal, the level of limited liability that your business needs, tax requirements, the nature of your business, and so on.

That being said, it is important that you seek expert legal advice before venturing into any of the two.

Conclusion

While a limited company and an LLP share some similarities in common and have some differences. It is important to understand both business structures properly before choosing the one to go for. This would help you easily distinguish between the two and know how they operate. Consequently, it will help you make a better decision. If you would like to learn more or get advice on which is best for you based on your business type, kindly contact one of our Incorpuk experts here.