LLP, limited company or partnership ?

Limited liability partnership provides benefits of both unlimited partnership and a limited company. The main objective is to preserve structural flexibility offered by partnerships and reduce the investment risk through the concept of limited liability. LLPs are particularly common in among professionals such as solicitors or accountants.

What are the differences between unlimited partnerships, limited liability companies and limited liability partnerships?

In the United Kingdom, limited liability partnerships are unique in that they operate very much in the same way as incorporated businesses. In other words, they are separate bodies and their existence is independent of the members. Therefore, if a partner in a limited liability partnership dies or walks out of the business, it does not affect the LLP’s existence. By comparison, in the case of unlimited partnership, the partnership would need to be dissolved and reformed as a new partnership without the leaving/deceased partner. Also, unlike in the case of unlimited partnerships, partners with limited liability are not responsible for other partners’ misconduct or negligence. Therefore, at no time the partners can lose more than their original investment. Limited liability partnership is similar to unlimited partnership in that the partners manage the business directly. This is different to limited liability companies in which shareholders own the business and delegate the management responsibilities to members’ elected board of directors. The board organises itself (also under the laws of the various state charters) and has the legal responsibility to manage the company in the best interest of its members.

What are the main tax advantages of limited liability partnership?

The main tax advantage over limited company is that each member is taxed separately by filing their own annual tax return. This avoids double taxation where profits are taxed with corporation tax and either income or dividend tax upon distribution to members and employees of the company. Aside of that limited liability partnerships attract a range of tax reliefs:

  • Capital Gains Tax – shares in limited liability partnerships are treated in the same way as in unlimited partnerships. Consequently, disposal of a partnership interest will entitle you to entrepreneurs’ relief through which you may be entitled to the lower 10% capital gains tax rate.
  • Inheritance Tax – since interest in partnership attracts the business property relief it can effectively be excluded from the value of the deceased’s estate. This applies only to property that is held in the name of limited liability partnership. Any property that is used by the partnership, but legally owned by the deceased attracts only 50% of the business property relief.
  • Interest Relief – investors who take loans to purchase shares in active limited liability partnership are entitled to interest relief. Therefore, you will be able to recover costs of the loan by claiming interest relief on your self-assessment tax return.

The above reliefs summarise main tax benefits of limited liability partnership. They apply to trading partnerships, as most reliefs are not available to partnerships that exist only for investment purposes.

Can I convert a limited liability company into limited liability partnership?

The Limited Liability Partnerships Act 2000 does not allow limited companies to convert into LLPs. The only way to start operating under limited liability partnership is to transfer your existing company’s goodwill such as name to newly incorporated LLP.

Should I establish a limited company or limited liability partnership?

Both limited liability partnerships and limited companies have their pros and cons. If your operation is likely to be small i.e. a one man business, it is likely that a limited company will offer you a cheap and quick solution. If on the other hand, you are planning on getting into a venture with a few business partners and rotations are likely to happen, limited liability partnership provides great exiting and entering strategies for partners. Finally, as your business progresses you can review your business plans and transfer the business over to a different form of legal entity.