So you and your friends want to start a business? To help you find the right business type for you, we look at the difference between LLP And LTD in the UK.
There are different business structures to choose from when you consider starting a business in the UK. Which type is best for you will depend on your individual circumstances.
If you want to start a new venture with friends or business associates, a sole trader won’t be for you. You are probably more likely to consider a Limited Liability Partnership (LLP), a partnership or a Limited Company (LTD).
A partnership is the equivalent of a sole tradership but with more than one owner. Whereas an LLP is closer to a Limited Company. In this article we will look at how an LLP and an LTD differ, to help you decide which one suits your new business best.
LLP Vs LTD At One Glance
| Limted Company | Limited Liability Partnership | |
|---|---|---|
| Legal status | Its own legal entity | Its own legal entity |
| Liability | Limited for all sharehlders and directors | Limited for all members |
| Incorporated | With Companies House | With Companies House |
| Confidentiality | More details are in public domain | Fewer details are in public domain |
| Number of owners | Minimum of one shareholder (sole owner) | Minimum of two designated members |
| Owned by | Shareholders | Members |
| Profits | Paid out to shareholders according to the number of shares they hold | Paid out to members according to agreed share distribution |
| Tax paid | Corporation Tax | None – but members have to pay Income Tax and NIC on their profit share |
| Allowable Expenses | Applicable | Not applicable |
| Capital investment | Possible through sale of shares | Not possible |
| Selling the company | Fairly straight forward | More complex |
The Difference Regarding Legal Status
Both these business types are their own legal entity, which means they can own assets in their own right, sign contracts and buy property. As a result, the liability for the owners is limited for both types. However, there are still differences.
Different Liability Criteria
The limited liability for LLP members is capped at the initial investment they have made. This means that if the company hits problems, they lose whatever money they have put in when they started the venture, but their personal assets are safe.
For a limited company, the limited liability covers directors and shareholders. Their liability is capped at the unpaid amount from the shares they hold. So again, their personal assets are safe.
Incorporation Differs Too
Although both types have to be incorporated with Companies House, the required documentation is different. A limited company has to submit a Memorandum of Association and Articles of Association.
The memorandum is basically just a document confirming who the first members are, their signatures and, if there is a share capital, how many shares they will each hold. The articles are a document that sets out how the company is run and owned.
Both of these documents will be made public on the Comanies House website after incorporation. This means that this information is accessible to anyone.
There is an equivalent to the articles for an LLP, the Members’ Agreement. It includes information about shares of capital held by each member, how profit and loss is shared, new members, outgoing members through expulsion or retirement, etc.
This agreement is confidential and won’t be made public on the Companies House website, which might be preferable to some people. However, there are some information that are public, like the Members’ Register and a register of people with significant control.
One big difference in terms of incorporation between an LLP and an LTD is that at least two members are needed to start a Limited Liability Partnership. After all, it’s a partnership structure.
A Limited Company can be started by just one person who can be sole owner of the firm.
One thing both types of businesses need to get registered with Companies House is an official business address, where they can receive documents and where company information is held. Both also need an official email address, which must be monitored.
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Directors And Shareholders Vs Members
A Limited Liability Partnership consists of at least two members, who have equal rights and are responsible for the company. There is a lot of flexibility when it comes to how an LLP is run, because this structure isn’t bound by the Companies Act 2006 but by the Limited Liability Partnerships Act 2000.
This flexibility covers how profits are shared, how capital is removed, how the structure is managed, how new members are appointed and retired, etc.
An LTD can have directors and shareholders. Each company has to have at least one director, who is responsible for the day-to-day running of the firm. This can be the owner, but that’s not mandatory.
The owner of a company is also a shareholder, of which at least one is needed. This means that one person can be both director and shareholder, running their firm completely on their own.
They can get investment through selling shares of their business. Not on the stock market though, as this is only possible for public companies.
Reporting Burden Is The Same
One thing that both structures have in common are their reporting responsibilities:
- Filing annual accounts with Companies House
- Submit Confirmation Statement every year to Companies House
- Maintain and keep company records, including a register of people with significant control
- Any changes have to be communicated to Companies House
Difference Between LLP And LTD In The UK In Financial Matters
Profit and taxes are one area where there is quite a difference between the two company structures. That’s because an LLP is treated the same as a partnership in these matters and not like a limited company.
Profits
With an LLP all profits that are made are divided between the members. Although the money can be left in the business to reinvest, the profit shares will still be considered an income for tax purposes, even if the members don’t actually get the money.
How much each member gets will depend on what was agreed in the Members’ Agreement. It can be distributed equally or unequally, depending on initial investment or contribution to the business.
On the other hand, a Limited Company can decide to keep any profits in the company, even if they have shareholders, without incurring the same consequences. The directors might decide that despite profits in one year, they won’t pay out any dividends to their shareholders.
However, if they decide to do so, they have to pay all shareholders. So you can’t decide to pay dividends to Mary and Carl but not Theodor.
Corporation Tax Vs Income Tax
One of the main differences between an LLP and an LTD is the way they are taxed.
As its own legal entity, a Limited Company is taxed as such. Therefore, an LTD pays Corporation Tax on its profits. Currently, this means that the main tax rate is 25%. However, this rate is only paid by companies that have yearly profits over £250,000.
Small businesses with profits under £50,000 pay the small profits rate of 19%. Firms that have a profit between these two thresholds pay 25% but with a marginal relief depending on their profits.
For example, a company with profits of £75,000 in the tax year 2024/25 would pay 21.51% Corporation Tax thanks to marginal relief. These rates can change, so it’s always good to check the government website for the most up-to-date information.
While a Limited Liability Partnership is also its own legal entity, for tax purposes it’s treated like a partnership. This means that all members pay Income Tax on their share of the LLP’s income. This is done via a Self-Assessment tax return.
Income Tax is divided into tax bands based on the income earned, with the lowest band at 20% (for an income between £12,571 and £50,270). This means that if the LLP earned £75,000 in the tax year 2024/25, and there are three members with equal share, each will have to pay 20% income tax on £25,000.
Even if the members decide to leave £5,000 each in the business, they still have to pay Income Tax on the whole £25,000, because of the way it works.
National Insurance Contributions are also to be paid by members, like any other self-employed person.
Generally, being a Limited Company is seen as more tax efficient for this reason. Directors of an LTD can pay themselves a salary, on which they have to pay Income Tax. However, they can decide to only pay a salary that is below the threshold for this tax, meaning they don’t have to pay it.
Then they can pay themselves the rest they want to take out of the business in dividends, which are taxed at a lower rate than Income Tax. There are more ways to extract profits from a Limited Company than with an LLP.
To ensure that you do it the most tax efficient way, our advice would be getting an accountant to help figure out what’s best for your business.
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Allowable Expenses
A Limited Company can deduct allowable expenses to reduce its tax bill. All expenses need to be justifiably used for business or as HMRC puts it “wholly, exclusively and necessary” for business.
The Limited Company can deduct these allowable expenses directly from its Corporation Tax bill. If you use an accounting software, this is easily done by marking any outgoing money correctly. The software will then deduct it from the income.
The remaining profit is then used to calculate the Corporation Tax amount. An accountant can help to identify allowable expenses to ensure the amount paid is as small as possible.
Because a Limited Liability Partnership doesn’t pay tax, it can’t deduct any allowable expenses. And the members aren’t able to do so either, as they have to pay Income Tax on their share of the profits.
This is another reason why a limited company is seen as more tax efficient.
Investment And Selling Off The Business
Due to the difference in how an LLP and an LTD are set up, investing in both is different. Selling the business is also different for the same reason.
Investing In A Limited Company Is Easy
For an LTD, gaining investment is relatively easy, as they can sell shares in their business. The shareholder doesn’t have to get involved in the company in any way, but can just wait for the dividend to be paid.
This is an attractive prospect for investors, as most aren’t interested in anything else than getting a return for their investment. By the way, when we say shares, we don’t talk about shares on the stock market.
For this to be possible, the Private Limited Company would have to become a Public Limtied Company (PLC).
On the contrary, investing in a Limited Liability Partnership is only possible by becoming a member. But this comes with responsibilities that many investors don’t want. As we have said, an LLP doesn’t have shares or shareholders.
Selling An LTD Vs Selling An LLP
Because of the difference in how both are structured, selling a Limited Company is much easier. As long as the shareholders all agree, a company can be sold to a buyer. All assets and liabilities are transferred to the new owner as these are owned by the company.
They receive all the shares and take control of the business. Any contracts with employees or clients will also transfer over automatically.
With an LLP it’s more complex and there are two ways to do it. Probably the easiest way is for the LLP to accept the buyers as new partners and the previous partners then retire, leaving the partnership in the hands of the new members.
However, depending on the terms of the Member’s Agreement, this might mean that the outgoing members don’t get anything, not even the initial capital they made. This way of selling an LLP isn’t aimed at making a profit for members.
If selling for profit is the aim, the sale of the LLP’s assets, such as client base, goodwill, employees and business name, is possible. However, after the sale has gone through, the Limited Liability Partnership has to be wound up, because the company itself can’t be sold.
The members will share the proceeds of the sale according to the share distribution as capital. This means Captial Gains Tax might be applicable. Which is also true if you sell a Limited Company.
Changing From An LLP To A Limited Company
As you can see, the difference between LLP and LTD in the UK is quite big in some areas. The Limited Company has some advantages over an LLP.
And sometimes, circumstances change. While a Limited Liability Partnership might have been the right decision when you started out, now being a Limited Company might be more suitable.
The good news is that you can change from an LLP to an LTD, should you wish so. Here is how:
- Register a limited company at Companies House. If you’re unsure about this process, download our free formation guide here.
- Transfer assets and liabilities from the LLP to the newly formed business. We’d recommend doing this under a contract and seeking legal advice to make sure it’s done in the best possible way.
- Get members of the LLP to officially resign, then enter new contracts with the limited company. This is the time to implement sole ownership, if this is why you want to change.
- Finally, dissolve the LLP.
If you want to carry out this process yourself, we’d recommend seeking advice from your solicitor and accountant to ensure that all assets are correctly transferred, and you are not liable for any extra taxation.
If the prospect of changing from one to the other feels overwhelming to you, you can use a company formation agency to do it for you. While they will charge a fee, it’s definitely the easier and less stressful option.
