As an accountant, I am often asked by my clients what the differences are between an LLP and a Limited company. While both provide limited liability protection, there are some distinct differences between the two.
An LLP is a type of partnership structure that offers limited liability to its partners, which means that their personal assets are not at risk if the business runs into financial difficulties or is sued. An LLP is similar to a general partnership, but unlike general partnerships, the partners are not personally liable for the company’s debts.
A Limited Company is a separate legal entity with its own legal personality, and its owners are known as shareholders. A limited company offers limited liability for its shareholders, which means their liability is restricted to the amount they’ve invested in the company.
Differences and Things to Consider
- an LLP is typically set up by professionals such as lawyers, accountants, or doctors who wish to operate as a partnership. Limited company can be set up by anyone, including sole traders who wish to take their business to the next level.
- Property Investors sometimes use a Partnership or LLP as stepping stone to incorporation which benefits from special SDLT treatment.
- Buy to Let investors prefer Companies as they can then recover all of the mortgage interest. This isn’t possible for individuals or partnerships as interest is removed and replace with the finance allowance. This can have a big impact for higher rate tax payers.
- Holiday Let owners may prefer LLP’s especially if there are large Capital Allowances to be claimed
- an LLP is taxed as a partnership, with profits being distributed amongst the partners and taxed at their individual tax rates.
- In contrast, a Limited company is taxed separately from its owners, and profits are subject to corporation tax rates. This can make an LLP more tax-efficient for its partners. For long term investment and building up assets a company can be more tax efficient because Corporation Tax rates are lower than income tax rates.
- With a company its easier to control when income is taken by the owners which could result in tax savings, partnership profits are immediately tax on the partners
- an LLP does not have shares or shareholders, but rather partners who own a percentage of the business.
One significant difference between LLPs and Limited Companies is that LLPs are relatively easier to set up and require lower capital outlay and less stringent regulatory requirements. The flip side of this is that limited liability protection may not be as comprehensive as it is with Limited Companies.
If you plan to raise funds for your business, Limited Companies have an advantage as investors are more likely to invest in these structures.
Changes in Ownership
Changes in ownership are more straightforward in a Limited company due to the ability to issue and transfer shares. In an LLP, changes in ownership can be cumbersome due to the need to re-do the partnership agreement and potentially consult with partners.
Overall, the decision between setting up an LLP or a Limited company depends on the specific needs of your business.