What is a Limited Liability Partnership?

When establishing a new business, legal structures may not be at the forefront of your mind. The likelihood is that your time will be taken up with far more practical concerns such as equipment, premises and making ends meet. However, it is vitally important that your business is formed in the correct way as this will have implications for a considerable period of time.

Forming a limited company, as explored in an article elsewhere on this site, has some significant drawbacks. A limited liability partnership, or LLP, is a legal structure that offers many of the advantages of incorporation while avoiding many of the downsides.

Basic Characteristics

A limited liability partnership shares many of the characteristics of regular partnerships. At its most basic level, this type of business consists of a number of individuals or organisations, each of whom assume a share of the rights and responsibilities associated with the business.

This means that, while they are generally each entitled to a share of the profits, they are also each responsible for its costs. This can be particularly attractive to those who are not in a position to take on the financial risks of establishing a business on their own. A limited liability partnership (or, indeed, partnerships in general) allows these individuals to spread some of the financial risks.

The great advantage of a limited liability partnership, however, is encompassed in its name. While each of the members of such partnerships must assume some responsibility for the financial risks entailed by the business, this liability is limited.

Specifically, any single partner stands to lose no more than the total personal assets that they invested at the outset, as well as any personal collateral they have offered as guarantees against credit. A limited liability partnership also offers flexibility in terms of management and financing. Under the terms of an LLP, the partners are free to manage the business as they see fit; this includes the ability to delegate tasks to individuals who are not partners.

Furthermore, while the default legal position is for profits to be split equally amongst partners, this need not be the case; the agreement of partnership can make provision for any mutually agreeable form of profit split. This enables the formation of a partnership consisting of one active member and a ‘sleeping partner’.

Potential Drawbacks

The benefits of a limited liability partnership are, however, contingent upon the fulfilment of certain responsibilities. In the first instance, as with a limited company, LLPs must submit annual accounts to Companies House.

Depending on the turnover of the business, these may require auditing. In addition to this, each of the partners is considered self employed for tax reasons. As such, they must submit annual self assessments to HMRC. Furthermore, any income derived from the partnership is counted as self-employed income and is therefore subject to Class 2 and Class 4 National Insurance Contributions, as well as income tax at the relevant rate.

Forming a limited liability partnership is a major step that can have lasting implications for your business. As such, it is essential that you seek reputable, independent advice from a solicitor or accountant before taking any other steps.