A limited liability partnership, or an LLP, is an operating structure for individuals or companies that wish to enter a formal partnership. Limited liability partnerships are regulated by Limited Liability Partnership Regulations, 2001, which sets out how an LLP must legally operate, how LLP’s are taxed, and member responsibilities.
Chris Bristow, a business debt expert at Real Business Rescue, shares a checklist on how to start a limited liability partnership, a breakdown of member duties, the financial treatment of an LLP, pros, and cons.
Starting a limited liability partnership – a checklist
If you’ve decided to start a limited liability partnership, our checklist takes you through the key decisions you must make to successfully incorporate a limited liability partnership.
- Choose a name – The name of your limited liability partnership must not be similar, or the same as another business. While you can pick another name to trade as, known as a trading name, your official name will be publicly displayed on the Companies House register and used for official documentation.
- Choose a registered office address – This address will be publicly displayed on the Companies House register and used for business correspondence.
- Choose designated members – There must be a minimum of two designated members who will fulfil statutory responsibilities. There can be any number of ordinary members and companies can also be a member of an LLP, known as a corporate member.
- Prepare and sign an agreement – An LLP agreement provides a breakdown of how the LLP operates, how profits are shared, who approves decisions, and how members can join or exit.
- Set up a limited liability partnership– Register a limited liability partnership with Companies House, or use a formation agent.
What are the duties of designated members?
A minimum of two designated members must be appointed for a limited liability partnership at any given time. Designated members differ from non-designated members, or ordinary members, as they are responsible for the legal administration of an LLP.
Here are the duties of an LLP designated member:
Filing responsibilities to Companies House – Prepare and submit company accounts and confirmation statement to Companies House.
Report changes to Companies House – The Companies House register is a public record of company information, including limited liability partnerships. You must report changes to your name, registered office address and member details to Companies House.
Register for Self-Assessment – The business and LLP members must register for self-assessment.
Register for VAT – The business must register for VAT if sales are expected to exceed £90,000 a year.
Appoint an auditor – Designated members can appoint an auditor, if required.
What is the tax treatment of an LLP?
The members of a limited liability partnership are classed as self-employed and therefore, must pay tax on their share of the profits, such as Income Tax and National Insurance Contributions. LLP members must register for Self Assessment as individuals, and register the business for Self Assessment.
As an LLP is a separate legal entity, the debts are its own, and LLP members are only liable for the capital they put into the business. While members are protected by limited liability, and therefore, will not be required to foot any financial losses personally, there are exceptions similar to those that apply to limited company directors.
Fraudulent behaviour, wrongful trading, and misconduct can find members personally liable for company debts. Personal guarantees are also tied to individuals, not the business, so if the LLP becomes insolvent, the personal guarantee must still be paid.
What are the pros and cons of a limited liability partnership?
An LLP is a separate legal business entity, which means that members are protected by limited liability, and therefore, not liable for the debts of the business, although there are exceptions.
The key difference between an LLP and a limited company, is that profits from an LLP will be treated as personal income, so members will be taxed accordingly. Profits must also be distributed within the same financial year which differs from a limited company.
A limited liability partnership can present a beneficial set-up for partners that wish to formalise a joint venture.
Want to have a chat about Limited Liability Partnerships? Get in touch with us at Elevate.
