What is a limited liability partnership? Understanding the operating structure of an LLP

September 24, 2021 / Business Tips

A limited liability partnership (LLP) is a type of business structure that differs from other types of business partnerships, including the limited company structure.

An LLP is regulated by several pieces of legislation which includes the Limited Liability Partnership Regulation 2001.

To help you understand more about the limited liability partnership, Clarke Bell has put together this guide outlining what an LLP is, how it works and how it differs from other business structures.

What is a Limited Liability Partnership (LLP)?

As we have mentioned, an LLP stands for limited liability partnership, referring to a type of business structure.

At least two partners must be appointed as members to set up an LLP. The LLP must be incorporated with Companies House and members must give a registered address for the business and keep a register of its members.

An LLP is owned by its members who have to fulfill the following duties:

  • File annual accounts
  • Register the LLP for self-assessment and, if applicable, VAT
  • Maintain accounts or appoint an accountant to do so
  • Represent the LLP in any legal matters
  • Report any changes to HMRC
  • Ensure the LLP is sticking to all forms of statutory compliance

An LLP is a separate legal identity from its partners. Partners of the LLP are only liable for the money they invest in the partnership.

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Key differences

There are several key differences between an LLP and a limited company.

One difference is tax. A limited company is taxed as a separate legal entity to the people that run it. This means that the limited company pays tax in its own right by paying Corporation Tax on taxable profits.

Directors of the limited company then pay income tax separately on the income they receive from the business.

A limited liability partnership, on the other hand, is not a taxable entity. Its members, however, are. This means that an LLP does not pay Corporation Tax. The company profits are instead distributed to company members who will then pay tax on the value of their portion via self-assessment.

Another difference between the two is that whereas a limited company can sell shares of the company, with an LLP there are no shares, directors or shareholders, meaning it can’t do the same.

The two are also different in that whereas one individual can set up a limited company and take on the roles of both shareholder and director, an LLP has to have at least 2 members who take on the responsibilities for statutory filing as well as any other legal requirements.

The final key difference between an LLP and a limited company is that, whereas the structure of a limited company is set, the structure of an LLP can easily be changed by its members.

How to set up an LLP

Setting up a limited liability partnership is a good option for those looking to go into business with others.

Before setting up an LLP, members will need to agree on how the business will operate, profit-sharing agreements, the responsibilities of each of the members and how any potential disputes will be settled. This is otherwise known as the limited liability partnership agreement.

To incorporate the LLP, you will first need to choose a unique name for the business and provide a registered address.

You must also provide details of:

  • Designated members of the LLP
  • The main activities of the partnership
  • A statement of compliance
  • A register of People with Significant Control

What are the benefits and drawbacks of setting up an LLP?

There are several advantages to setting up an LLP.

Firstly, the members of the LLP can be companies as well as individuals.

Secondly, an LLP offers protection for members’ personal assets through limited liability.

There is also flexibility relating to the management of the partnership as well as how profits are distributed. Furthermore, there is flexibility in terms of membership as individuals can decide on the level of involvement they wish to have in the partnership.

Although there are several benefits to setting up an LLP, there are also some drawbacks to this route.

For example, the LLP’s accounts and financial position are made public. What’s more, the administrative costs can typically be higher than a standard partnership owing to extra accounting and filing needs.

What happens when an LLP is insolvent?

In the case that an LLP is struggling financially and has become insolvent, there are several options available.

  • LLP liquidation: just like a limited company, an LLP can enter into liquidation. The most common form of insolvent liquidation is Creditors’ Voluntary Liquidation (CVL) and compulsory liquidation. With a CVL, members choose to put the company into liquidation, whereas with compulsory liquidation, the partnership will be forced to close by creditors who are owed money and have taken action through the courts.
  • LLP pre-pack administration: another option open to insolvent LLPs is to go into a pre-pack administration. This is an option that aims to help the company recover from insolvency and restore profitability. Here, the LLP will be put into administration and its assets will be sold. This sale has to be arranged before the company enters administration to ensure there is a suitable buyer.
  • LLP CVAs: an LLP can also enter into a Company Voluntary Arrangement (CVA), which is another route that aims to turn the company around and rescue it. Here, the appointed Insolvency Practitioner creates a plan of how and when the company will pay back creditors to which they owe money. Find out more about CVAs in this handy guide.

Need help with an insolvent LLP?

If your limited liability partnership is facing insolvency and you’d like to know more about what options you have, Clarke Bell is here to help.

We will work closely with you to get to know your situation and find the best way forward under the circumstances. To see how we can help you, simply give one of our friendly team members a call today.