Which type of legal entity is right for my business?
In the following article, we will summarise and weigh up the differences between a limited company and a limited liability partnership to provide increased clarity between the two structures.
What is a Limited Company?
A limited company is a separate legal entity in its own right. Limited companies can legally own property, commence legal proceedings, and even own shares in other companies, as per relevant Company Law. Companies can claim the right to a fair trial, to freedom of expression, and to property rights. This is why many Sole Traders & Partnerships tend to incorporate.
As the company is registered at Companies House or Registrar of Companies, specific information regarding the business must be supplied and becomes published and therefore publically available. The following company information such as a list of Shareholders, Company Directors and any annual financial records.
‘Limited’ means that the Shareholders’ or members liability regarding any company debt are limited to the sum they originally paid for the shares in the company. Once they have paid for their dividends they have no further accountability in relation to the company’s finances.
A team of 2 or more Directors manage the general day to day activities of the company and do not need to be Shareholders but can often be both in SMEs. Directors have a legally enforceable duty of care to always act in the best interest of the company.
All revenue or capital gains generated by the company are owed and consequently paid by the company. Directors & Shareholders also pay tax individually on any income received in the form of salary or dividends.
What is a Limited Liability Partnership?
Similar to the Limited Company, a Limited Liability Partnership is also a separate legal entity in its own right, meaning it can enter into contracts in its own right and hold assets. It is required to register all relevant business information such as registered office address with the Registrar or Companies House, making this information available to the public.
The main difference of the LLP lies in the name. This type of legal entity also has Shareholders; however they are partners in the company. This means effectively running the business and sharing the revenue together. Each Shareholder is liable for paying tax on their share of the revenue, like a standard unincorporated partnership. The same principle of having limited liability also applies to this structure.
Partners of an LLP are taxed as self-employed individuals (like a traditional partnership) making the tax treatment of an LLP increasingly favourable than that of a Limited Company dependent upon the circumstances. Each partner is liable for tax on their share of the LLP’s revenue.
A Limited Liability Partnership can be much more flexible than that of a Limited Company regarding the dividing of revenue. The LLP members can agree on how to divide profits in the shareholders agreement which can be vary (according to the specific agreement) without having to issue more dividends or amend the share capital structure which is required in a Limited Company. The LLP shareholder agreement is a private contract which does not need filing with the Registrar of Companies.
A Limited Liability Company is generally a more popular choice than a Limited Liability Partnership. However, an LLP arrangement can be a lot more flexible than a Limited Company particularly taking into consideration the various profit sharing arrangements that can be agreed. The structure of an LLP can also be more beneficial for professional organisations as the partnership can be officially incorporated, and taxed in the manner of a traditional partnership, ensuring financial liability protection limited to the value of their shares and a more flexible structure to suit the founding partners.
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