Limited Liability Partnership (LLP) Vs Limited Company

TAXATION DIFFERENCES

Considering each type of taxation in turn:

INCOME TAX

Partnerships, irrespective of legal structure, are “tax transparent” to the extent that the individual partners are assessed for income tax on their share of the profits of the Partnership, and this tax is assessed irrespective of the timing or value of partners “drawings”.

Furthermore, as partners are taxed on a self-employed basis, profits are time apportioned for when a partner joins or leaves the business.

In contrast directors and shareholders are only assessable to Income tax in respect of either the salary or dividends that they withdraw from the business when these funds are withdrawn.

As such there are tax planning opportunities within limited companies to retain funds within the business and withdraw these in the future when it may be possible to utilise lower rate tax bands.

Likewise, where a director is also a shareholder it is sometimes possible for them to alter their salary / dividend split to withdraw funds more tax efficiently.

NATIONAL INSURANCE

As partners are self-employed they need to account for and pay Class 4 (formerly also Class 2) National Insurance Contributions.

Directors as employees of a limited company must pay Class 1 employee’s NICs, and the company itself must also pay Class 1 and Class1A employer’s NICs on director salaries and benefits respectively.

CORPORATION TAX

Only limited companies are required to pay Corporation Tax.

Given that Corporation Tax rates are now between 19 and 25%, and the rate is determined based on the profitability of the limited company, there is scope for an LLP to be more tax efficient than a limited company in those circumstances where directors do not have the flexibility of receiving dividends and therefore receive the majority (or all) of their income as a salary.

Nevertheless, salaries, benefits, and employers’ national insurance are all deductible for purposes of calculating Corporation Tax.

VAT

The treatment of VAT is largely consistent between both LLPs and limited companies.

ADMINISTRATVE DIFFERENCES

SOLE MANAGEMENT

By definition a Partnership must have at least two members.

Limited companies do not have this limitation, and it is possible to tailor the Articles of Association (AOAs) and Memorandum of Association (MOAs) of a company to accommodate single owner / managed businesses.

SCOPE OF LIMITED LIABILITY

In both cases the liability of directors and partners is normally limited to the value they invest in the business.

Although for a limited company this is the value of their share capital, or the value they have committed to guarantee, and for an LLP it is the amount invested by the partner.

It is worth noting though that a partner’s personal assets are more at risk from “claw-back” in the event that the business becomes insolvent and there is evidence of wrongful trading.

LLPS DO NOT HAVE SHARES

This is a fundamental difference which impacts a number of key areas:

• Raising Finance Capital – It is not possible to sell shares to raise equity finance for the business.  Nevertheless, LLPs can still raise finance in other ways such as: member investment and loan finance.
• Transfer of Ownership – It is not possible to sell shares to transfer ownership.  Although LLPs have more flexibility to alter their ownership and management structure at any time by agreement between themselves.
• Separation of Ownership and Control – It is easier to structure a limited company to achieve the separation of ownership (by the shareholders) and control (by the directors).  In contrast, while it is possible to structure a partnership to have “Limited Partners” who are primarily investors, in most cases the members both own and manage the business themselves.
• Extraction of Profits – Profits in an LLP are allocated to a partner on the basis of the Partnership Agreement and may be withdrawn at any time as “drawings”.  Profits in a limited company are allocated to shareholders on the basis of their equity share ownership and may be withdrawn when they have been declared by the directors as “dividends”.

EMPLOYED VS SELF-EMPLOYED

Members of an LLP are treated as if they are self-employed for tax purposes, whereas in a limited company directors are directly employed by the business, and shareholders are only entitled to dividend investment income.

Where the director of a limited company is also a shareholder, then greater tax planning opportunities exists for extracting profits.

CONFIDENTIALITY

Partnership Agreements where they exist are private documents and do not need to be published at Companies House.

Whereas in a limited company the Articles of Association (AOAs) and Memorandum of Association (MOAs) are public documents which can be reviewed by anyone at Companies House.  Although companies can optionally also have Shareholder Agreements in place which can remain private.

OTHER DIFFERENCES

There are a number of other administration differences, but the main ones include the fact that LLP’s are not required to hold board meetings (as there are no directors), or shareholder meetings (as there are no shareholders), and they are not required to make decisions by resolution.

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