Limited Liability Partnership (LLP) — Advantages And Disadvantages
A Limited Liability Partnership (LLP) is a business structure that offers some advantages of both a corporation and a partnership. LLPs are popular among lawyers, accountants, and doctors who want to enjoy the benefits of operating as a partnership while limiting their liability for business debts.
The members or partners are a separate legal entity from LLP. They are only liable for the money they invest or any personal guarantees they provide. The partnership is incorporated at Companies House and can only be used by profit-making businesses.
Limited Liability Partnerships have several key advantages and disadvantages if you consider this business structure for your company.
Advantages of Limited Liability Partnership
1. Personal liability protection: One of the most significant advantages of an LLP is that the partners have limited personal liability for the debts and actions of the partnership. The partners’ assets are protected if the LLP goes into debt or is being sued.
2. Flexible management structure: LLPs offer a more flexible management structure than corporations. Partners can agree on various management structures, such as equal ownership and decision-making power or a hierarchical structure with designated partners having more control.
3. Pass-through taxation: Like partnerships, LLPs are “pass-through” entities, meaning that the partnership itself is not taxed on its profits. Instead, the partners distribute the profits, and each partner reports their share of the income (or loss) on their personal tax return.
Disadvantages of Limited Liability Partnership:
1. Difficult to raise capital: One of the biggest disadvantages of an LLP is that raising money from outside investors can be challenging. Because LLPs offer limited personal liability protection, potential investors may be hesitant to invest in an LLP because they will not have the same control or asset protection as they would in a corporation.
2. Complexity: LLPs can be more complex to operate than other business structures due to the need to comply with partnership and corporate laws. It can make LLPs more expensive to set up and maintain than simpler business structures.
3. Limited life: One of the disadvantages of an LLP is that it has a limited life span. If one of the LLP partners leaves or dies, the LLP must be dissolved and reformed with new partners. It can be a significant hassle for the remaining partners and may discourage potential new partners from joining the LLP.
LLP or Ltd — which is better?
There are many similarities between a limited liability partnership and a limited company. According to businessnerd.com the purpose of an LLP structure is to promote the growth of partnerships. Also, this structure encourages business ownership and flexibility in management and pay. It offers the combined advantages of a corporation and a partnership.
However, LLP is popular among professionals such as lawyers, accountants, and doctors who want to enjoy the benefits of operating as a partnership while limiting their liability for business debts.
Advantages of an LLP include personal liability protection, a flexible management structure, and pass-through taxation. Quite the opposite, the Disadvantages of an LLP can consist of difficulty raising capital, complexity, and a limited life span.
Overall, one should consider Limited Liability Partnerships’ advantages and disadvantages before choosing this business structure. However, if you are confused about which partnership structure you should adopt — limited or unlimited, you can get help here.
LLPs can offer significant benefits, but they also come with some drawbacks. Therefore, Weighing the pros and cons will help you decide if an LLP is the right choice for your business.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 13 years of experience in practice 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. This dexterity led him to be Enterprise Nation’s Top 50 Advisors. Jibran recognised the need to manage the innovative disruptions sustainably early on and shaped Clear House Accountants not just to 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.
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