When comparing UK limited liability partnership formation with that of UK companies there are several similarities and differences which are evident. The comparisons described in this article will articulate some of the more significant features and will cover attributes relating to both the initial formation of an LLP and company and the variations which occur following the successful setting up of each business vehicle.
Formation of a Limited Liability Partnership and Company
Up until 2010, there were marked variations in the formation process associated with most UK companies and limited liability partnerships. The electronic facilities available for registering UK companies did not exist for the setting up of LLPs which meant that physical documents (namely the LL01 form) had to be used for their incorporation.
Today however, the formation procedures in forming limited liability partnerships and UK companies are virtually identical with both lending themselves to fast online incorporation methods as standard.
The options for guaranteed same day registration also exists for the two business entities allowing people to jump to the front of the Companies House incorporation queues and receive a complete and officially registered LLP or company in as little as 10 or 15 minutes.
By way of a comparison, the registration procedures for limited liability partnerships and UK companies both allow instant name searches which can check to see if a chosen title is available. Following a positive name search result, the purchaser can complete the full application online, entering respective partner, director and shareholder information together with registered office address details.
The provision of limited liability is present (and implicit in the names) for both LLPs and UK companies. Limited liability partnerships provide the protection benefits usually available to corporate entities whilst still allowing what is essentially a partnership business structure.
Following many large and public company failures, Accountants (who traditionally operated unincorporated partnership structures) were frequently prone to negligence claims with plaintiffs claiming their work failed to highlight potential financial problems which should have come to light following audit and accounting assignments.
These, as well as other factors have led to the formation of several limited liability partnerships in this and other related industries. Thus the apparent open-ended potential for claims on personal assets has been closed.
With the availability of limited liability protection, one might ask why every “ordinary” partnership does not undergo an LLP formation and afford themselves the benefits of having the individuals running the business separate from the entity itself.
The answer frequently lies in the requirement for limited liability partnerships to present and file annual accounts, just as UK companies are obligated to do. Many traditional partnerships seemed ill-prepared and unwilling to adhere to the laws which would necessitate the publication of their profit or losses statements and balance sheet information.
In short, the similarities in rules which require limited liability partnerships and UK companies to publish statutory accounts have resulted in some unincorporated partnerships remaining as they are.
One distinct area which might determine whether an individual person opts for the formation of a limited liability partnership or decides to form a UK company is how each accounts for their respective taxation on profits and gains.
LLPs are taxed in the same way as “ordinary” partnerships; that is the total partnership profit is deemed to be allocated to each partner according to a prior agreement or evenly in the absence or one.
Thus the alternatives for dividend payments and salaries afforded to UK companies are largely irrelevant to a limited liability partnership as a whole. The sum of all gain and profits will be assessed on one partner or another whereas a UK company can decide how much is allocated to the business and how much to the individual directors.
The arguments which are stated for businesses which amass large quantities of stock or other items which create a substantial paper profit but result in no significant or discernable cash withdrawals therefore apply here. Companies’ taxation rates at 21% may appear far more attractive in comparison to personal tax charges of 40%.
LLP and Company Constitutions
When comparing limited liability partnerships and UK companies, another area where LLPs have more in common with traditional partnerships is in the area of their constitutions.
UK companies are largely governed by their memorandum and articles of association which emanates from the Companies Act 2006. Smaller companies do not in fact have or require additional documents prepared to govern other aspects of their constitution.
During the formation of limited liability partnerships no memorandum and articles of association or the equivalents are issued and thus the LLP is incorporated without detailed descriptions of salaries or profit shares for example.
UK companies utilise the statement of capital to depict ownership, different classes of shares and the resulting claims to profits associated with each category.
Thus an LLP similar to an “ordinary” partnership often needs to create a separate and definitive agreement between the partners which extend the partnerships act’s coverage to their individual business operations.
The above comparisons between the formation of a limited liability partnership and a UK company suggest that the choice between which to incorporate would often be clear.
The essence of a partnership usually exists beforehand when selecting the LLP option; be it the type of industry the business will operate in and also the traditional vehicle used in that type of business.
In the above analysis comparing both entities, it has been suggested that in the absence of specific reasons or advice for setting up a limited liability partnership a UK company is frequently the more appropriate proposal. Professional advice should of course always be sought as a means of properly assessing particular requirements and circumstances.