There are three types of partnerships: a limited liability partnership (LLP), a limited partnership (LP) and an ordinary partnership.
An LLP is a partnership between two or more persons that is registered at Companies House. Registration and compliance with company law gives the partners the advantage of limited liability in the same way that shareholders are protected in limited companies (LTDs).
An LP is also registered at Companies House. However, it must have at least one general partner who does not have limited liability and accepts the liability of the partnership. The remaining partners in an LP can enjoy the protection of limited liability.
Traditional partnerships (those that are not registered at Companies House) do not enjoy limited liability and are becoming less common.
Limited liability means that the partners cannot be held financially responsible for the debts of the partnership and their personal assets are safe. LLPs have become particularly popular with financial services organisations and professional practices such as accountants, lawyers, doctors, surveyors and engineers. Furthermore, LLPs can suit small and family owned businesses. Their popularity stems from the flexibility of working and profit sharing arrangements they can accommodate.
There are a number of disadvantages in using the LLP model for business:
- Taxation. An LLP is not taxed in the same way a company is taxed. UK companies pay a very low rate of corporation tax. The current rate is 19%, and it ranks as one of the lowest in the OECD countries. An LLP simply collects the profits of the partnership and allocates it to each partner in accordance with the partnership profit sharing agreement. Then, the individual partners pay personal tax on those profits, which, in the UK, can be as high as 45%.
- Retaining funds. Some businesses require substantial capital to grow. Companies retain profits by paying little taxation and issuing easily manageable dividends. LLPs find it difficult to retain significant profits because all profits are allocated to the partners who pay tax at potentially very high rates.
- Raising capital from investors. Limited companies wishing to raise capital can issue further shares privately or apply for a listing on a stock exchange. Shareholders limit their exposure to the amount they invest and can appoint and dismiss directors. The partnership structure does not allow for the introduction of outside shareholders, and this form of fund raising is not possible.
A LLP must have at least two partners who are designated members. It is quite usual for all partners to be designated members, but this is not essential. Designated members are the legal representatives of an LLP and are responsible for ensuring that an LLP meets its statutory and compliance obligations.
LLPs are popular because they offer 4 key advantages:
- They limit the liabilities of the partners; therefore, the individual partners’ personal assets are protected if the partnership experiences financial difficulties and cannot pay its debts. In this respect, they are the same as LTDs.
- They allow flexible profit sharing arrangements to suit each partners’ requirements. Unlike LTDs, LLPs do not have a written constitution known as the Articles of Association, which is a publicly available document filed at Companies House. LLPs usually have a partnership agreement, which is not a public document and can be changed whenever partners join or leave or change their profit sharing arrangements.
- Partners are entitled to be involved in the day-to-day running of the partnership. This is not the case in LTDs. Only the directors of a LTD are allowed to manage the company. The shareholders are the owners of a LTD company, but they designate the running of the company to the directors.
- Partners can leave and join extremely easily. This is not the case with shareholders in a company, who must buy or sell their shares to reflect their interest in a company. This can be difficult if there are no buyers or sellers.
Duties of the designated partners:
- In relation to Companies House
- Filing annual accounts.
- Filing annual confirmation statements.
- Providing details of any changes in the partnership or partner’s details.
- Updating records about Persons of Significant Control (PSC).
- Appointing an auditor if necessary.
- In relation to HMRC
- Filing annual partnership tax return by providing details of the trading gains or losses, rents received, dividends received and capital gains and losses and then allocating those results amongst the partners.
- Operating PAYE schemes for employees.
- Operating a VAT scheme where applicable.
- In legal matters
- Ensuring compliance with money laundering regulations.
- Representing the partnership in other legal matters.
Setting up a LLP:
You can set up a LLP by registering at Companies House. This is a simple process that can be performed using our website. It takes a few minutes to complete the application, and once you have made the payment, it is submitted to Companies House, who will process it in within 3 hours to one working day, depending on their workload. You will need the following:
- At least two partners.
- At least two designated partners. Hence, if there are only two partners, they must be designated, but if there are more, you will need to indicate which, if not all, are designated partners.
- An official address of the company, which is known as the registered office.
- Service addresses of the partners, if you do not wish to publish their personal addresses on the Companies House website and make their details publicly available.
Limited companies have a written constitution called the Articles of Association, which are available for viewing on the Companies House website. However, LLPs are not obliged to have one. Additionally, LLPs normally have a partnership agreement, which is not a publicly available document. Our partnership pack includes a free partnership agreement template. Partnership agreements normally deal with the following:
- Contributions to capital.
- Share of profits.
- Withdrawal in the event of death.
- Length of partnership.
- Dispute resolution.
In the event that there is no agreement (written or otherwise), the following arrangement will apply:
- The partnership cannot force a partner to leave
- Profits must be shared equally.
- Each partner’s contribution to the partnership capital account must be equal.
Partnership Number Falls below 2:
In the event that a partnership is left with only one partner, the partnership has 6 months to find an additional partner. If the partnership fails to restore the partnership to a minimum of 2, it will lose its limited liability status.
Dormant Partnership Accounts:
All LLPs, whether they have traded or not, are obliged to deliver accounts to Companies House. However, a LLP is dormant if it has had no transactions during an accounting period. In such a case, it can deliver dormant partnership accounts.