There are several ways to set up a business in the UK, each with distinct benefits. Incorporating a business as either a limited liability partnership (LLP) or a private company limited by shares (Company) are two common structures available where you want to better manage your risk and liability. This article compares the two.
Most Appropriate Structure
LLPs are often used by professionals that traditionally use partnership models, for example lawyers and accountants, whilst a Company is the most popular form of business structure.
The Legal Bit
A Company is predominately governed by the Companies Act 2006. On the other hand, LLPs are regulated by the Limited Liability Partnerships Act 2000 alongside associated regulations.
Both entities are formed by lodging documents with Companies House. At least two initial members are needed to set up an LLP, while a Company requires just one owner manager. Once registered, each have ongoing regulatory requirements to file documentation such as annual accounts with Companies House. Any lodged information is publicly accessible.
Each type of business must be run in accordance with the respective legislation and the rules set out in any constitutional document specific to the entity.
For LLPs, usually the members will enter into a partnership agreement. This is a legally binding contract detailing the rights, duties and liabilities of each member. Any partnership agreement is a private document and confidential to the members.
A Company is subject to its articles of association. The articles specify the rules for running the Company, and govern the rights, responsibilities and liabilities of members. Unlike partnership agreements for LLPs, articles of association are essential and the most up to date version must be filed at Companies House, making these publicly available.
Generally, LLPs have more flexibility than a Company in relation to its management and sharing of profits. Changes to the LLP are implemented by agreement among the members, while a Company must comply with statutory obligations to effect certain changes. This includes evidencing board meetings and decisions of members satisfying certain thresholds. Some changes must be filed at Companies House.
Ownership and Control
LLPs are owned and controlled by the members who invest in the entity. In contrast, ownership of a Company is divided into shares held by shareholders, whereas management is delegated to directors who need not be shareholders in the Company.
Shares are obtained through either subscription to the Company for new shares or the transfer of existing shares from current shareholders. Shareholders are entitled to the rights defined within the Company’s articles of association. These can include the rights to distributable profits of the Company, to vote at meetings of the entity and the entitlement to some of any capital of the Company should it be wound up on a solvent basis.
Both structures have a separate legal existence from their members. This enables members to operate with limited liability, which caps the amount of money each member has to contribute towards the entity’s debts, even on the business being wound up.
LLPs are tax transparent. This means that rather than the LLP being taxed itself, the members are responsible for paying tax on their share of the LLP’s profits. Contrast this with the position of a Company, where the Company itself pays the corporation tax and capital gains tax on its taxable profits.
How We Can Help
There are significant differences between an LLP and a Company. We are experienced in advising on what business structure is most appropriate to an individual’s needs. Please contact any member of the corporate team or your usual Brodies contact for further information.
On February 13, 2020