When embarking on a profitable business venture, it is imperative to opt for the appropriate and favourable business structure to leverage the tax and liability protection benefits. In this regard, there are several business vehicles, each with its place, purpose, and benefits. Accordingly, we are going to list the advantages of an LLP over a limited company.
However, the choice is always between a Limited Liability Partnership (LLP) and a Limited Company for most of the business owners and managers. Moving ahead, the LLP’s potential benefits outsmart a limited company, given its flexibility and profit-yielding capacity.
If you want to know what an LLP is and how it operates, read our guide: What is a Limited Liability Partnership (LLP)?
The advantages of an LLP over a limited company
The following are the major benefits that will help you decide why you should opt for setting up an LLP over a limited company.
Also, to learn how to incorporate an LLP, read our blog: How to set up an LLP in the UK?
Structural Flexibility:
The first and foremost advantage of a Limited Liability Partnership (LLP) over a limited company is the greater structural flexibility and adaptability it offers. To illustrate, the LLP members can viably change or adjust the distribution of profit shares among members.
Similarly, the partners have the autonomy to alter or change the managerial structure, collectively deciding the duties and responsibilities of members in accordance with their experience and competence.
Besides, LLP members outline significant decision-making processes in the agreement, like the appointment or joining of members, their exit or departure from the company, and so forth.
More importantly, while doing so, they are not bound to follow any strict or rigid obligations of the Corporate Law. Consequently, an LLP has ample flexibility to evolve and flourish with the changing needs of the members.
On the contrary, although the directors and managers have a certain degree of flexibility when running a limited company, their decisions and actions are mostly regulated or governed by the Companies Act 2006.
Moreover, the Companies Act has several restrictions and regulations that a limited company cannot flout or defy. As a result, a limited company’s structure has little room for flexibility to adapt to the evolving requirements of its stakeholders.
Simplified formation and compliance:
Admittedly, setting up or incorporating an LLP is far more simplified, easy, and cost-effective than a limited company. For instance, compliance for LLPs is viable and easy to perform.
To go into detail, unlike a limited company, there are no mandatory statutory audits for LLPs if their annual turnover falls below a specified threshold. Similarly, there are fewer filings and reports required annually than a limited Company. Lastly, there are reduced government fees for LLP incorporation and maintenance.
Separation of ownership and management:
The separation of ownership from management is a significant advantage of an LLP over a limited company. Further elaborating, in an LLP the members who co-founded the LLP also remain directly involved in its management.
Explaining further, similar to a traditional partnership, the LLP partners carry out the roles of both the owners and managers of the business.
Subsequently, this allows for a close alignment between ownership and management decisions. Additionally, the members oversee and supervise the day-to-day tasks with increased scrutiny and a hands-on approach, ensuring seamless execution of tasks with little room for any negligence.
By contrast, the ownership is distinct from the management in a limited company, where the owners, called the shareholders, employ the directors or managers to run the business.
In addition, the directors are the employees of the company, and they are responsible for ensuring company operations run smoothly, compliance with regulations, and finance management.
This separation leaves the shareholders with little or no control and influence over the daily execution of the tasks since they have now delegated or transferred the operational duties to appointed directors.
As an outcome, the separation of ownership from management in a limited company can often cause disharmony or disconnect between the owners ‘interests and the company’s operational strategy.
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Agreement privacy:
Agreement privacy is another plus among the advantages of an LLP over a limited company. For greater clarity, although both LLP and a limited company are registered at Companies House, the LLP agreement remains private and confined to those involved in the partnership.
For additional information, the LLP agreement outlines the key details around which the partnership revolves.
Subsequently, this privacy benefits the partners who are disinclined or unwilling to make the confidential information accessible to the public. This way, their partnership and operational details are protected from the public eye and scrutiny.
On the other hand, the articles of association of a limited company state the regulations governing it, and they are easily accessible to the public. Thus, the confidentiality of the LLP agreement outdoes the limited company in terms of privacy.
No corporation tax:
Another domain where the advantages of an LLP over a limited company stand out is the taxation of profits. How profits are taxed in an LLP varies greatly compared to a limited company. That is, an LLP pays no corporation tax.
Instead, the members are responsible for fulfilling the tax liabilities. To clarify, the LLP members pay income tax on the share of the profits allocated to them as per the partnership agreement.
On the flip side, a limited company is liable to pay corporation tax that ranges between 19% and 25% based on the annual profits between £50,000 and £250,000. Consequently, this makes the limited company subject to double tax payments.
No double taxation:
One of the notable advantages of an LLP over a limited company is its tax efficiency. Considering the structure of an LLP, it doesn’t pay any tax itself. Rather, tax liabilities are directly transferred to its members, who pay income and capital gains tax on their assigned profit shares.
As an outcome, the profits of the LLP members are only taxed individually, ensuring there is no double taxation in the LLP.
Conversely, a limited company is subject to double taxation. To explain, the limited company first pays corporation tax on the profits it produces.
After the profits are distributed to shareholders in the form of dividends, they will have to pay shareholders’ dividend tax on the dividends at the individual level. Hence, this double taxation creates an additional tax burden on the shareholders.
Ultimately, this illustrates that an LLP is more tax-efficient for its members than a limited company.
Limited liability protection for partners:
One key similarity between an LLP and a limited company is that both offer limited liability protection. While LLP partners enjoy limited liability, limited company shareholders also benefit from it.
Further elaborating, in an LLP, the financial liability of the partners does not exceed or remain confined to their agreed financial input or investment. Likewise, a limited company also protects the shareholders’ personal assets from the company’s liabilities.
However, while limited companies also offer limited liability, LLPs combine this limited liability protection with the structural flexibility of a traditional partnership arrangement, as explained above. Therefore, for professional firms like accounting, law, and consulting businesses, it becomes an immensely significant benefit among the advantages of an LLP over a limited company.
Final thoughts:
In brief, choosing the right business structure by keeping in mind tax optimisation and managerial ease is crucial to determining the trajectory your business will steer into.
The upsides and downsides of an LLP vs a limited company must be considered before reaching a final decision. However, the advantages of an LLP over a limited company certainly stand out, as illustrated above.
Yet, it is wise to take advice from an adept accountant regarding which set-up is the most viable for your business. With Accountingfirms, your tax and accounting concerns are thoroughly addressed. Likewise, the accountants available on our platform will craft personalised solutions in congruence with your business requirements.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.