An LLP is essentially a hybrid structure between a general partnership and a limited company. It's recognised as a legal entity in its own right, just like a company. It is intended for use by businesses that would normally operate as a partnership, typically bringing together groups of experts or professionals, like dentists, or vets or lawyers, architects and accountants.
In this model, the partners are called 'members'. They must contribute or guarantee a sum to the running of the partnership (often this is managed by way of a loan facilitated by a specialist provider).
Like fully paid up shareholders in a limited company, members of an LLP have full limited liability, meaning that if the business becomes insolvent, they are only liable for the debts of the business up to value of their partnership contribution; their personal assets are ring-fenced and protected (provided that the business is not being operated fraudulently). Under an ordinary partnership model, the partners are personally responsible for all the debts of the partnership and there is no limit to that liability.
Profits are divided between the members according to the terms of what's agreed within their membership arrangements. Each member pays tax on their share of the partnership profits and is treated like a self-employed individual (as opposed to the business being taxed as a whole and the partner receiving a salary, which would be the case with directors or employees under a limited company model). Members must register for self-assessment, pay income tax and national insurance on their share of profits and prepare their own tax returns for HMRC. The LLP itself does not pay tax.
If you're thinking of setting up an LLP, get a view on the tax implications and ensure each member individually does the same. You'll need to ensure that everyone's expectations and preparations are well-managed.
To put in place an LLP, you'll need to:
- Choose a name
- Have a registered address (also known as your principal place of business)
- Choose at least 2 members
- Register as an LLP with Companies House
Here's how it works and what you need to consider.
Step 1 - Choose a name
You must choose a name for your LLP, which could be a combination of your own names as partners, or another name of your choosing ('LLP name'). You can trade under your LLP name, or choose a different name to trade under, which is known as your trading name. Your LLP name will be registered when you set up the LLP, but you do not need to register your trading name.
Your LLP name must end in 'limited liability partnership' or 'LLP'. It must also not be the same as, or too similar to another registered company or LLP's name. The name cannot be offensive, or contain a sensitive word or expression without permission, for example 'dental', 'bank' or 'police'.
The full list of sensitive words can be found on the gov.uk website, as well as who to apply to for permission to use such words in your name if you happen to choose one from this list.
You must include the trading name (if you have one) on official paperwork, for example invoices and letters.
Technically, you must include all of the partners' names on official paperwork as well. However, if there are too many names to reasonably fit, then it's fine to just state in small print at the foot of your paperwork that a full list of partners is available at the registered office of the LLP, and on its website, as applicable.)
If you do choose a trading name for your LLP, there are some rules around what you can choose too.
LLP trading names must not:
- Be offensive
- Be the same as an existing trade mark
- Contain a 'sensitive' word or expression without permission of the relevant body, for example 'dental', 'bank' or 'police'
- Suggest a connection with government or local authorities, unless you get permission
- Include 'limited liability partnership, 'LLP', 'public limited company' or 'plc'
It's advisable to protect your name by registering it - and any brand identity that you design (e.g. a distinctive logo or strapline) - as a trade mark.
Step 2 - Choose where you want your registered address to be situated
Your registered address (known as your principal place of business) is where official communications are sent, for example letters from HMRC.
It must be:
- A physical address;
- Your main place of business; and
- In the same country that your LLP is registered (for example, a limited partnership registered in Scotland must have a registered office address in Scotland) - once you're incorporated you can move anywhere in UK
You can use a PO box in your address, but you must also include a physical address and postcode after the PO box number.
You can use your home address - but it's worth bearing in mind that that this information will be publicly available and it could invite unwieldy and unwelcome volumes of correspondence as your business starts to grow.
Step 3 - Choose your members
Partners in an LLP are referred to as members, and have full limited liability. Each member pays tax on their share of the profits, but isn't personally liable for any debts the business can't pay.
There is no maximum number of members, but there must be at least two members to constitute an LLP.
A member can be a person or a company (known as a 'corporate member'). At least two members must be 'designated members', but you can have any number of ordinary members after that.
You should make an LLP agreement with any other members as part of setting up your LLP. This sets out how the LLP will be run, including:
- How profits are shared among members
- Who needs to agree decisions
- Members' responsibilities
- How members can join or leave the LLP
You can either write your own, or get a solicitor to help you.
Responsibilities of all members
Members must carry out their duties and meet their legal responsibilities as set out in the LLP agreement.
Every member must register for self-assessment with HM Revenue and Customs (HMRC).
Responsibilities of designated members
You must have at least 2 'designated members' at all times.
Designated members have more responsibilities than ordinary members and must:
- Register the business for self-assessment with HMRC as well as registering for self-assessment as an individual
- Register the partnership for VAT - if you expect your business's sales to be more than £85,000 a year
- Appoint an auditor if needed
- Keep robust accounting records
- Prepare, sign and send annual accounts to Companies House
- Send a confirmation statement (previously annual return) to Companies House annually.
Designated members must also:
- Tell Companies House about any changes (for example, to the registered name or address, or members)
- Act for the LLP if it's wound up and dissolved
Designated members can be prosecuted if they don't meet their legal obligations. (The LLP can also be taken off the register for not operating lawfully.)
Note on appointing an auditor:
The members of every LLP must prepare accounts for each financial year. There is no requirement for LLPs to use a professional accountant, but members should be aware of their legal responsibilities regarding the accounts and may find it prudent to seek professional assistance. These accounts must generally be accompanied by an auditors' report stating the name of the auditor and signed and dated by them (unless the LLP is exempt from audit). The auditor must be independent of the LLP, but if your company's accountant is also a registered auditor, you can appoint them as the auditor for your company.
If your accountant is not a registered auditor, and if they cannot put you in touch with an auditor themselves, then you can search for a firm on the Institute of Chartered Accountants in England and Wales website that does LLP audits.
There is exemption from having an audit for certain small LLPs and micro-entities but only if they are eligible and wish to take advantage of it. For accounting periods beginning on or after 01/01/2016 to qualify for audit exemption, an LLP must qualify as small, in relation to that financial year.
In other words it must meet any 2 of the following:
- Annual turnover must be not more than £10.2 million
- The balance sheet total must be not more than £5.1 million
- The average number of employees must be not more than 50
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