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.
| 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 by them |
| 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 |
| Alteration of capital structure | Not easy | Easy |
| Capital | Minimum £1 for private limited companies. Shares are 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 | Drawn 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 bodies are allowed but at least one must be a natural person. | At least two designated members are required. Corporate members allowed including companies registered 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. PLCs require two. | Two members required. |
| Decisions | Majority decisions prevail and certain decisions (more than 75%) require approval from members. | Subject to agreement based decision-making. If not specified in the agreement, the LLP must act unanimously. |
| 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 capital and take an equity stake via the issue of shares. | Outside investors can only subscribe to initial 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 | 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 | 6th April to 5th 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.
