LLP vs Limited Company

UK LLP vs. UK Limited Company

Often businesses need to decide what sort of an organisation structure suits them best. Various choices often get narrowed down to one between a limited company and a limited liability partnership. Here are some areas that could be looked in to whilst making that choice.

Regulation and administration

	Private Limited Company	Limited Liability Partnership
Regulating law	Companies Act 2006	LLP Act 2000
Minimum number of members	One	Two
Liability of members	Limited to the unpaid amount on shares	Limited to the amount of capital agreed to be contributed in the event of winding up
Constitution	Memorandum and Articles of Association, to be filed with the Companies House	Agreement between members, not required to be filed with the Companies House
Registration with the Companies House	Required	Required
Legal Status	Separate legal entity, can own land, sue and be sued in its own name.	Separate legal entity, can own land, sue and be sued in its own name
Annual Return	Required to be filed with Companies House	Required to be filed with Companies House
Annual Accounts	Required to be filed with Companies House	Required to be filed with Companies House
Alternation of capital structure	Not easy	Easy
Capital	Minimum 1p for private limited companies and £50,000 for PLCs. Shares divided into different classes and denominations with varying rights.	No restrictions on capital and capital is not divided into shares
Distribution	Either through salary or dividends	Draw on profits of the LLP according to agreement
Return of capital	Not permissible unless through buy back of shares or redemption of capital	Subject to agreement terms
Management	Minimum one director for private limited companies. Non-UK resident directors and corporate directors allowed but at least one must be a natural person	At least two designated members are required. Corporate members and those resident outside the UK allowed.
Directors of failed business	Restrictions on acting as directors	No restriction
Company Secretary	Not needed for private limited companies	The two designated members are responsible for company secretarial matters
Members	Companies limited by shares or guarantee require only one member. Plc and unlimited companies require two.	Two members required.
Decisions	Majority decisions prevail and in certain cases more than 75% majority approval required	Subject to agreement clauses, but unanimous decision required , the LLP Act sets out majority decision though
Decisions (resolutions)	Members may pass written resolutions.	Depends on the agreement.
Annual Meetings	Private companies need not have an AGM	No regulations on meetings.
Investment in to the business	Outside investors may contribute share capital (and take an equity stake without becoming a director) or loans.	Outside investors can only contribute loan capital. Only members can take an equity stake.
Borrowings and registration of charges	Debentures and fixed and floating charges.	Same as the private limited Ltd company
Audit	Not required for ‘small companies’	Not required for LLPs that qualify as ‘small’
Registration as Charity.	Possible for a company limited by guarantee.	Not possible
Transfer of shareholding	Easy	Not easy

Taxation

Whilst there are several areas to be considered from a tax perspective, if the business is likely to make more profits than what is to be distributed then the limited company option would seem a better one.

	Private Limited Company	Limited Liability Partnership
VAT	No difference	No difference
Corporation tax	Applicable	Not applicable, members are taxed individually
PAYE	Applicable to directors	Not applicable to members, but 2014 amendment taxes disguised employment
Employer NIC	Applicable	Not applicable to members, but 2014 amendment taxes disguised employment
Class I	Applicable for directors	Not applicable, but 2014 amendment taxes disguised employment
Class 2 and 4	Not applicable	Applicable
Capital gains tax	Applicable on the company and on shareholders	Applicable on members, and on LLPs in insolvency only
NIC relief	Applicable	Not applicable
Entrepreneurs’ relief	Available	Available
Tax Year	Related to ARD	6^th April to 5^th April
Deferring tax liability	Possible using ARD	Not possible
Enterprise Investment Scheme	Applicable	Not applicable
Tax on loan to participators	Applicable	Not applicable

The 2014 amendments to the way LLPs are taxed make it an unsuitable structure for large businesses which historically employed a large army of members on fixed payments.

Tax Partners