LTD vs LLP: What are their key differences?
Most times people tend to confuse LTD for LLP. These are two different separate types of business entities. At Incorpuk, we help happy clients with advice on the best business structure based on their business type. If you would like to know which business structure is great for you, kindly contact Incorpuk here.
In this article, we will explain what an LTD means, what an LLP means and the differences between the both.
First of all, we will have to give a brief explanation of what both the LTD and LLC
What is LTD?
LTD stands for a limited company or limited liability company. The limited companies are mostly privately owned companies which are mostly managed by the management and not the shareholders. The shareholders elect directors who take care of the activities within the company and govern the company on their behalf. A shareholder can also be a director or even a member of the company.
In a limited company, the company has a line between the earnings of the company members (especially shareholders) and the earnings of the company. With this, the company pays taxes and the shareholders and directors of the company also pay taxes.
What is LLP?
An LLP stands for limited liability partnership. In this type of company, the members are referred to as partners. The partners can be involved in the running of the business or absent themselves from the running of the business. Here no directors are elected for the management of the business and the business is managed directly by the partners.
In a partnership, no tax is paid as the tax is paid by the partners directly from their accounts since there is no line between the personal assets of the partners and that of the company. In the limited liability partnership, the lowest number of partners is 2 with no specific highest number of partners.
Differences Between LTD and LLP
Since we've known a little about limited companies and limited liability partnerships, we should talk more about what differentiates them.
The LTD and LLP may have some similarities since they are all corporations, but the LTD lies between a corporation and a company and the LLP lies between a partnership and a corporation.
Below are some differences between the LTD and LLP stating some significant reasons why.
1. Legal Structure
In a limited company, the company is legally a separate entity on its own and is separated from its members such as the directors, shareholders, secretaries and persons with significant control of the company.
The shareholders own parts of the company through shares and do not entirely have control of the company. They also bear a limited liability which means their personal properties or assets do not have any connection with the company's assets and cannot be at risk from the company's debts and liabilities.
A limited company must register with Companies House before they can legally operate and all activities and operations of the limited companies in the UK are regulated and governed by the Companies Act 2006 of Companies House.
An LLP is a business entity between a traditional partnership business and a limited liability company. It is often referred to as a hybrid business structure. In an LLP, there exist two different types of members; the designated members and the ordinary members.
The designated members of the partnership have other duties aside from being partners in the business. Duties such as keeping company's information in place, filing annual accounts and statements and also ensuring the members of the partnership adhere to the rules and regulations governing the business entity.
In an LLP, shares do not exist so there is no presence of shareholders unlike in limited companies. Here, the members (partners) gauge a director's ownership or stake in the partnership itself. The liability of a partnership member solely depends on the amount they have previously invested in the partnership or the amount they are to invest
2. Business Liability
One of the most important advantages of a limited liability company is the limited liability of its members. This limited liability afterwards shields or protects the member's (shareholder's) assets from the assets of the company thereby protecting it from the company's liabilities and debts.
If a financial crisis arises in a limited company, the shareholders are only liable to contribute the value of their shares or any debts or unpaid bills on the shares they own. The shareholders do not have a direct connection between the debts and liabilities of the company so do not have to contribute to the debts of the company.
Creditors cannot hold a shareholder of a limited company responsible in the case of an unpaid debt or liability. This limited liability secures the personal assets of the shareholders or any other members of the company.
In an LLP, as the name implies, it also has a limited liability to an extent. The extent of its limited liability is not as secure as that of the limited company.
Generally, an LLP offers protection from the debts and liabilities of a business but this also depends on the individual behaviours of the partners. If a member is directly related to the debt and liability of the company, they may become liable to the company's debts and liabilities. If their actions are also out of negligence or wrongful conduct, they also may be held responsible for their actions.
This is to imply that, LLP also offers limited liability as that of a limited company, but this is also limited to the actions and conduct of individual members of the business partnership unlike in limited companies where the members are entirely protected from the company's debts and liabilities.
3. Tax
In a limited company, the company is subjected to corporation tax on the profits it makes from trading and other taxes including VAT. The shareholders of a limited company are also subjected to self-assessment in which they pay tax on any untaxed income (dividends) they receive from the company. Directors of the company are also subjected to self-assessment.
Members of the limited companies are also subjected to taxes through the PAYE (pay as you earn) scheme. The taxes paid by limited companies are very complex and this solely depends on the structure of the company, the size of the company and the business activities carried out by the company. Limited companies are also subjected to deductions and relief from taxes.
LLP entities unlike LTD entities are not subjected to corporation taxes. These entities are treated as "tax transparent". This means the partnership does not have to pay taxes on the profits or even losses of the business.
The profits and losses of the company are directly passed through to all partners of the company and all partners must report both the profits and losses of the partnership on their annual returns. The members of the LLP pay the tax directly from their personal earnings on behalf of the company.
Unlike in limited companies where both the company and its members pay their taxes differently, here the taxes are paid by the members alone. The taxes of an LLP member vary depending on the size of the member's earnings.
4. Reports
Limited companies are subjected to reports and fillings. The filings and reports of a limited company include
- The annual accounts or financial statements of the company
- Annual returns
- Confirmation statement
- Some necessary filing at Companies House
- Tax returns at HMRC
Some other fillings are to be kept at the company such as directors, shareholders, secretaries, persons with significant control and other members of the company's reports.
Larger limited companies also need to undergo annual company audits.
In a limited company, directors have legally assigned duties by Companies House and failure to meet these duties might attract sanctions. Although the directors are assigned with the duty of filing reports, secretaries of the company can also file some of these reports as they are employed as helping hands to the company's directors.
LLP entities also do report requirements but although they do, they are not as hectic as the reports of the limited companies. In the LLP, only the designated members are responsible for any obligations of the business entity.
The designated members are responsible for filing the annual accounts and confirmation statement at Companies House.
Unlike LTD which can undergo audits, LLPs do not have to undergo annual audits unless they meet certain criteria. Once the LLP exceed the specified annual turnover threshold or annual asset threshold in a particular year, it can now undergo an annual audit.
Since LLPs do not pay tax directly as a business entity, they do not report tax returns to HMRC as this is done by each member of the partnership from their annual reports
5. Flexibility
In limited companies, most of the activities of the company are governed by the Companies Act 2006. This guide provides strict regulation to the overall activities and decision-making process of the company. The Companies Act 2006, also governs the activities of directors in the company and to a lesser extent shareholders and other members of the company.
Due to the Companies Act, limited companies have lesser dynamics in company activities since they cannot go against the Act. All company members must abide by these rules provided by the Companies House and also, and their articles of association are also by the Companies Act of 2006.
If on incorporation, the company does not meet the requirements of the Companies Act, the company cannot be incorporated and if during trading, the company violates any of these rules, the company might face sanctions as serious as company dissolution.
The LLP have a dynamic and flexible system. Unlike limited companies, the LLP make up their rules and regulations and can change them at any time.
The partners decide how the decision-making process should go, how members are appointed or selected and how members are removed from the partnership. The partners also decide how the profits of the business are shared and used in the business, how the management structure should be and some other necessary decisions of the company.
6. Incorporation
Both limited companies and LLP are incorporated at companies house and all necessary filings are submitted at Companies House.
During incorporation, the members of the company are called the shareholders and the directors and the shareholders, although they own the company through shares, they appoint the directors to manage the company.
The shareholders can also be the directors of the company at the same time. The shareholders can also be persons with significant control of the company if they own a high percentage of the shares of the company. At incorporation, the company offers shares to its members.
The limited companies also have another type which is limited by guarantee, here the members are called guarantors and no shares are issued during incorporation. The constitutional document of a limited company is referred to as the articles of association.
Unlike the limited companies, the members of a LLP are called partners. Here, the partners are divided into two; the designated partners and the ordinary partners. Instead of the directors of a limited company that manages the company, here the designated partners manage the business.
The designated partners file all reports at Companies House and are responsible for the active decision-making of the company. The ordinary partners just contribute to the business and receive profits.
The constitutional document for the LLP is the Members' Agreement and in this document, all agreements on the activities and regulations of the company are listed here. Unlike the articles of association that, when changed, must be reported to Companies House, the Members' Agreement can be changed by the partners at any time.
7. Confidentiality of Company's Information
In limited companies, the information of the company available in the articles of association is made public at Companies House. Here all information about the members of the company is listed in the articles of association and every change must be reported and implemented on the public records of the company.
The articles of association will contain the company's address, members and all information of the members except the residential address of their members which are sometimes made private for the safety of the members.
In some cases, the limited companies can achieve a level of confidentiality of share structures and information through the Shareholders' Agreement which is not filed at Companies House but is implemented alongside the articles of association.
All information regarding the operation and activities of an LLP which is documented in the Mambers' Agreement is kept private. This document does not need to be filed at companies house and therefore, can only be accessed by partners of a company whenever they need it
The Members' Agreement contains information such as profits sharing, loss sharing, management responsibilities, the appointment of new partners, retirement of old partners, removal of partners, conflict resolution, and shares in capital.
This Members' Agreement serves as the articles of association of the LLP entities and must be followed by the members. When a change is made in the Agreement, no need to file a report to Companies House to implement it in public records unlike the limited companies all changes need to be filed at Companies House.
Partners can also choose to start operating the partnership without a Members' Agreement and there will be no. prosecution, unlike limited companies that cannot be incorporated without an article of association.
8. Sale of Part of Whole of the Business Entity
In a limited company, if the article of association permits the sale of shares, then the shareholders can sell off their shares. Once the shareholders sell off their shares, their information is removed from the public records of the company.
The shareholder can decide to sell the shares to the company, another shareholder in the same company or an individual who is not part of the existing shareholders or members of the company.
If the company as a whole is to be sold off, the shareholders and directors will agree to sell off the company and the amount gotten from the sale is shared amongst the shareholders depending on the percentage of shares the individual owns in the company.
Once the company is sold off, the new company owner can change the name, directors and shareholders information of the company at Companies House. In some cases, the new owner can also change the business activity of the company.
In an LLP, the sale of partnership can be done in two ways; either by accepting new members and retiring old members or the sale of an asset of the partnership to another individual. If the partnership is sold off, the profit gotten from reb sales can be distributed to partners according to the Members' Agreement.
The partnership can only be sold to two or more partners and cannot be sold to one person, unlike the limited companies. Once the partnership is sold off, the new partners can change or correct the Members' Agreement as well as make a new Members' Agreement for the partnership. The name of the partnership can also be changed by the new partners.
Also, in limited companies, the transfer of shares attracts a capital gains tax which must be paid to HMRC especially if the shares are sold at a profit. Although capital gains tax is attached to the transfer of shares or company assets, if the company or individual is liable to a Business Assets Disposal Relief, then the individual can pay a lesser tax amount or none at all.
However, in partnership, the transfer of profit from one partner to another does not attract a capital gains tax. A tax will only be applied if the partner disposing off the profits made a gain from their account.
Limited companies can accumulate growth of trades and will only be taxed on shares if the shares are distributed successfully. Partnerships can also accumulate profits in the same way but the taxes paid by the partners will be on an annual basis since tax legislation requires a yearly tax.
9. Investment
In limited companies, investors can buy shares and invest in the company without being directors of the company. These investors can also be persons with significant control of the company if they buy a large amount of shares from the company.
These investors will have to partake in the decision-making of the company and can also request company annual audits from the director. These persons can also request for implementation of a change in the article of association of the company or some necessary information about the company.
Once an investor invests in a limited company, they are liable to dividends from the company and cannot participate in the losses of the company except if they are owing certain charges relating to their shares.
In a limited liability partnership, investors can only become partners since they cannot buy shares from the business. The partners can agree to not receive investors as partners. However, the process of investing in a partnership does not require as much paperwork as that of a limited company which requires a lot of paperwork and your information must be added to the public records of the company at Companies House.
The profits accredited to these investors will depend on the agreement of the partnership like in a limited company where every shareholder is liable to a particular percentage of the company's annual profits or dividends. These investors can choose not to participate in the business activities by registering as ordinary partners of the business entity
Investors sometimes prefer to invest in limited companies because of the limited liability of the company while others would prefer the LLP since they can be members yet not participate in any business activity.
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Conclusion
Although LTD and LLP are similar in some ways, they also have vivid differences. The determination of which type of business entity to run solely depends on the type of business activities, the preferences of the business owner, the type of business structure, the business industry and some other personal reasons. You must note that a limited company pay taxes unlike LLPs that do not pay taxes but taxes are deducted directly from the account of its partners and the taxes are reported on the personal tax returns report of the partners of a company. Do you have any questions about the differences between LTD and LLP? If so, kindly contact one of experts at Incorpuk here.