16 Jul
LLP vs ltd: Which partnership structure should I adopt – Limited or Unlimited?
What is a partnership and how many types of partnerships exist in the UK?
A Partnership is commercial by nature and is formed when two or more individuals collaborate in common business activities with the aim of earning profits together. Three different types of partnership exist in the UK according to different Partnership Acts
- Conventional partnership:
A conventional partnership was introduced in the Partnership Act (1890) and is taxed transparently whilst property and land cannot be held under it. In this structure, each partner has unlimited liability which is shared by each partner personally which includes:
- any losses made by their business
- all outstanding payments from their business personally
- Limited partnership:
The limited partnership structure was introduced in the Limited Partnership Act (1907) and differs from limited liability partnership. In this structure, each partner has their liability limited to their capital contribution to the partnership with one partner with unlimited liability. The business name is also protected under the Companies House.
- Limited liability partnership
Limited liability partnership,, a company structure that functions under the Limited Liability Partnership Act (2000) and the Companies Act (2006), is also subject to transparent taxation whilst property and land can be held under it.
Selecting a business structure can be complicated and can create many issues if selected without thinking about the short and long term benefits. It is always advisable to locate a startup accountant, an accounting firm nearby, a chartered accountant, or a professional who can help you set up the correct foundation for your business that helps you in the short term and the long term.
Which entities are unable to form partnerships?
- Charities and non-profit organizations do not fall under the category of partnerships.
How are partnerships taxed?
- Partnerships are subject to tax transparency which implies that every individual in the partnership is taxed individually rather than the partnership being taxed as a single entity apart from its owners.
- Special taxation is applicable to partnerships, such taxation incorporates a number of anti-avoidance and targeted anti-avoidance regulations.
- According to corporation tax rules in the UK, if the partnership comprises a company as one of the partners then the company is taxed on the profit it earns.
Tax can be complicated, we always recommend speaking to an expert startup accountant or an Accountant in London to understand and fulfil your tax obligations
What are the characteristics of the various partnerships:
Partnership Law identifies three different types of partnerships that exist in the UK
- Conventional partnership
- Limited partnership
- Limited liability partnership
Conventional partnership:
The characteristics of a conventional partnership are somewhat similar to a sole trader in nature:
Characteristics:
- Partners are responsible for their own debt whilst sharing responsibility for each other’s debt as well.
- Profits are shared according to the agreement agreed between partners whilst all the partners are subject to standard taxation individually.
- The partners who are not actively involved in managing the business may be barred from claiming sideways loss relief if the partnership suffers from losses.
- Individual partners are allowed to charge rent on the property that is let to the partnership for business purposes.
The limited partnership:
A limited partnership differs significantly from limited liability partnerships
Characteristics:
- There has to be at minimum a single ‘general partner’ who has unlimited liability.
- Limited partners are only liable to lose the amount of capital they contributed to form the partnership if the business terminates (for reasons other than fraud or dishonesty).
- Losses incurred by the partners in a limited partnership are proportional to the amount of capital they contributed.
- A limited partner may provide the necessary initial funding but is not allowed to manage or keep the partnership together.
The limited liability partnership (LLP):
This partnership shares characteristics of conventional and limited partnerships.
Characteristics:
- The LLP is considered as a whole separate legal body from its owners.
- In a limited liability partnership, taxation is transparent similar to taxation in a conventional partnership.
- Losses incurred by the partners are proportional to the amount of capital that they contribute.
- LLPs fall under tax anti-avoidance regulations.
- Accounts of LLPs are registered under companies house.
- Appointed partners in the liability partnership may take a role as the company officers.
- Limited liability of a partner will terminate if:
- That partner knowingly lets the LLP go bankrupt. Additionally, that partner will also be liable to pay an amount equivalent to the profits generated during the last two years of service.
- That partner took major company decisions that were inspired by his/her personal motives.
What is the difference between limited or unlimited?
Individuals conducting a trade or a business usually opt for an LLP due to the relaxation it offers on liabilities by making them proportionally limited to the amount of capital that each partner contributes along with being a separate legal entity meaning that the company carries a separate corporation tax liability than its members.
On the other hand, a limited partnership is favourable for estate planning because limited partnerships are not required to register with companies houses while LLPs have to. This version of the partnership makes the management of private equity and investment funds favourable and efficient as well. If you wish to take part in business but want someone else to lead it whilst you sit back and follow the directions, you should go for limited partnerships.
LLPs lets you enjoy flexibility in general terms whilst a limited partnership is desirable if you are interested in funds, asset management or estate planning. Consult an accountant or accounting firm if you are still confused about what type of partnership to adopt and the regulations surrounding it.
Why is an agreement necessary when working with a partnership?
It’s important to have a partnership agreement in place due to the uncertainty about the life of the partnership and when it might dissolve. A partnership agreement helps establish rules and may assist in:
- Delegating responsibilities
- The succession plan
- The capital investment
- Determining profit and loss distribution to each partner
- Dealing with the death of a partner
- Dealing with the divorce of a partner
Clear house accountants are specialist Accountants in London. Our team of startup accountants, personal tax accountants, online accountants and business advisers have been trained to help you stay ahead of complicated compliance, select the best solution for your business and help you make decisions that help your business grow. Our accountants will always provide you with the smartest and most reasonable solutions for your business after carefully analyzing the nature of your business and the vision you have for it.
Author Bio
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.