What is a limited liability partnership?
A limited liability partnership (LLP) is a legal business structure that is a combination of a standard partnership and a limited company. An LLP has at least two members where each member has limited liability, meaning that there’s less of a financial risk than other business structures.
LLP’s are required to submit annual accounts every year to Companies House. Read more about year end accounting for limited companies.
In an LLP, the business is a separate legal entity. Setting up an LLP is common for small businesses because it provides limited liability, which separates the owner’s personal finances from the business finances.
How are LLPs different from limited companies?
There are several similarities between an LLP and a limited company. Under both business structures, it is required to incorporate the business with Companies House. If your business is incorporated, there are more meticulous reporting requirements than other business structures. Both business types also have limited liability for owners.
However, the main difference is the internal management structure and the amount of people involved in the business.
A limited company must include directors and shareholders, which is not a requirement for an LLP. The only requirement for LLPs is that they must have at least 2 partners. However, the partners do not need to be actual, living people. A partner can be a limited company or other entity.
For limited companies, any changes to the management structure, including the shareholders and directors, needs to be updated with Companies House. LLPs can change their internal structure whenever it is needed.
Another difference is that LLPs must be for-profit businesses, whereas limited companies can include not-for-profit organisations.
How are LLPs different from a standard partnership?
In a standard partnership, members have unlimited liability. This means that the owners are personally liable for any business debts. In an LLP, the business is a separate legal entity and the owners have limited liability meaning that they cannot be held personally responsible for any financial losses incurred by the company.
In addition, owners of a standard partnership do not separate their personal and business finances. This means that if the business fails, the bank or lender could seize the owners personal assets to pay off business debts.
On the other hand, owners of an LLP separate their personal and business finances because the business is a legal entity. Therefore, LLPs have more financial and legal protection and are not required to use personal assets to cover any company losses.
Setting up a limited liability partnership
Setting up and incorporating your LLP can be a complex process. There are certain details that Companies House will require upon registration that we have outlined below.
Choose a name and registered address
The first step is choosing a name for your LLP. Although this is an obvious step, it is important because the name you choose will be a key part of your branding.
When you register your LLP with Companies House, you will need to also register an official name and address. You should decide if you wish to have a different business name and trading name, but the business name is the one you need to register with.
There are several rules surrounding your business name. They cannot be offensive, cannot be the same or too similar to another business’ name, and cannot be linked to the government or local authorities.
You will also need a registered address when you incorporate. This is the address that all official notices and correspondence will be sent to. It must be a physical address or PO box, and it must be in the same country that your business is registered. For instance, an LLP registered in Wales cannot have a registered address in England.
Choose your designated members
An LLP is required to have at least two ‘designated members’. The designated members have more responsibilities and are required to file the company’s accounts and register for Self Assessment with HMRC. Other than the designated members, an LLP can have as many ordinary members as they wish.
Create an LLP agreement
Whenever you start a business with other members, a written agreement should be made. An LLP agreement explains how the business will be run. It should include the following:
- The responsibilities of members
- How new members can join the LLP and how existing members can leave
- Who will be involved in business decisions
- How business profits will be divided among the members
It is recommended to have a lawyer help you write the LLP agreement, however, you can write one yourself without a lawyer’s advice.
Register your LLP with Companies House
Once you have prepared all of the aforementioned details, you will need to register your LLP with Companies House. This is the process of incorporating your business as a legal entity. You can register through approved software, by post, or with a formation agent.
There is a small fee to register which varies depending on the registration process you choose. You can apply for same day registration if you register before a certain time and pay a higher fee.
Once your LLP is registered, you will receive a certificate of incorporation from Companies House.