The Benefits Of Changing From LLP To LTD In The UK

The first step to setting up a business is to decide what structure is best for you. But what was best for your venture at the start might not be best for it now.

As businesses grow and evolve, their needs and the needs of their owners might change. And this could mean that it’s time to consider a change of business structure.

If you are currently running a Limited Liability Partnership (LLP), you might wonder if a Limited Company (LTD) could help your business get to the next level. But why change from LLP to LTD?

There are definitely benefits to running an LTD. Despite the many similarities between these two business types, like they’re both their own legal entities and offer limited liability to their members/shareholders, there are also differences.

For example, when it comes to taxes and investment. You can find out more in our article about the difference between LLP and LTD.

However, in this article we look at the benefits and drawbacks of changing from an LLP to an LTD, so you can make the right decision for your business.

Why change from LLP to LTD – 5 Reasons To Do It

At first glance, the difference between an LLP and an LTD might seem negligible. But having that extra liability protection and a different tax status opens up a world of benefits.

This includes: 

1. Limited companies get allowable expenses

One of the biggest benefits of being a limited company is that you aren’t taxed on your personal income but instead pay a lower Corporation Tax. And on top of this, you’ll also be able to claim for allowable expenses reducing your overall tax bill. 

Now, that doesn’t mean that you can write off every single receipt as a business expense. That would be cheating the system, and you’ll be facing an HMRC investigation faster than you can say ‘write off’. 

Allowable expenses for limited companies are purchases that are ‘wholly, exclusively, and necessary’ for business purposes. And before you go thinking that spa day is essential for your business health, there are categories and guidelines as to what makes an allowable expense, including: 

• Travel costs and everyday milage
• Accountancy, legal or other professional fees
• Bank or other financial charges
• Business insurance policies
• Charitable donations
• Staff events or Christmas parties (limited to once a year, at max £150 a head)
• Equipment expenses, or office costs

To find the fuller list, read our guide to allowable expenses for a limited company. 

An LLP doesn’t pay taxes, instead the members pay Income Tax on their profit share and allowable expenses aren’t applicable. As a result, a Limited Company is more tax efficient.

2. You can retain profits 

In an LLP, any profits that are made have to be paid out to members – which are then subjected to Income Tax. If you’re turning over a big profit, this means that you could lose out quite a lot to taxes. 

And even if you decide to leave the profit in the business for reinvestment, the members still have to pay Income Tax on their share, regardless of whether they take it out or not.

In contrast, a Limited Company doesn’t have to pay profits out via salaries. Profits can be kept and used to self-invest in the company for continued growth. 

What’s more, LTDs can choose to pay their stakeholders via dividends, which has a lower rate of tax than personal Income Tax. This allows stakeholders to take home more of the profits without paying so much out to tax. 

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3. You can have sole ownership

The whole point of Limited Liability Partnerships is that they are a partnership. You are always sharing ownership and responsibility of the company with a partner or several partners – and thus have to deal with shared decision-making and the red tape that comes with it. 

With an LTD, you don’t need to share ownership and can have the company run by just one person, while the partner can be involved in a stakeholder capacity. This is great if one partner is thinking of leaving or retiring, as it means the company can continue to function without losing its protected liability. 

If a partner leaves an LLP leaving only one partner, it will be automatically converted into a sole tradership, which creates more vulnerabilities. That’s because you have to have at least two designated partners to qualify for an LLP.

4. You create investment opportunities 

You might wonder why change from LLP to LTD is necessary, if investment is your goal. To buy shares in an LLP, you generally have to become a member. This means that people can’t invest in your company without becoming involved and sharing some of the responsibility. 

Shares and shareholders don’t exist in the structure of a Limited Liability Partnership.

In contrast, people can invest in LTDs without becoming directors – making it easier to secure and obtain investment. 

This makes it much easier to attract investors, if you want to bring your business to the next level but need money to do so.

However, neither an LLP nor an LTD can list shares on the stock market. In order to list shares here, a private Limited Company (LTD) must be converted into a Public Limited Company (PLC). 

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5. Your company can be sold 

If you’re thinking about selling your company for a profit, then converting an LLP to an LTD is an essential move. All takeovers, acquisitions, and general selling of companies are easier to complete as a Limited Company. 

That’s because you can’t just ‘buy’ an LLP. You have to purchase the goodwill and assets of the partnership and complete contractual obligations like transferring existing clients. It’s a longer and more drawn-out process, with more areas that could go wrong inside it. 

If you’re looking for a simple sale, converting to an LTD will make the process a lot smoother. 

Drawbacks of changing from an LLP to an LTD

As we have seen, there are many benefits to changing your Limited Liability Partnership to a Limited Company. And in some circumstances it’s the only way, like if you want to be the sole owner without losing liability protection or if you want to gain capital investment.

In those cases, you just have to accept the downsides. But if your reasons are different, you might just want to take a few minutes to consider what you might lose by changing to an LTD.

1. Loss of flexibility

One of the benefits of an LLP is that you have much more flexibility when it comes to decision-making, because the roles of the partners can be defined in the partnership agreement. There is much more freedom about how the company is run.

A Limited Company is bound by the rules and regulations of the Companies Act 2006, which makes the structures much more rigid. On the other hand, an LLP is covered by the Limited Liability Partnerships Act 2000.

The adding and removing of partners is also easier with an LLP compared to the removal of a director or shareholder with an LTD. Members can also easily change internal rules and arrangements if circumstances change.

This type of flexibility in how you run your company will disappear when you change to a Limited Company, so it’s worth considering if this will cause a problem for your business.

2. Loss of privacy

One big advantage of LLPs is that not as much information about the company is made public by Companies House on their website as is with a Limited Company.

Information like the official business address, official email address, register of members and persons with significant control and annual accounts are publicly available for both types of companies.

But while a Limited Company’s Articles of Assocciation are made public, partnership agreements made by members of an LLP are confidential. This means that how responsibilities and profits are shared won’t be in the public domain.

This confidentiality you’ll lose if you change from an LLP to an LTD.

Going from a Limited Liability Partnership to a Limited Company

Now that you know the benefits of changing from an LLP to an LTD and also what you will lose, let’s look at how you would go about converting one to the other.

There are two ways to do it: you can do it yourself or hire a company formation agency to do it for you.

Here are the steps to take if you want to take care of it yourself.

1. Stop trading – you must have ceased trading at least 3 months before you dissolve the LLP
2. Set up a Limited Company – you can do this on the Companies House website – download our free guide for help
3. Transfer all assets and liabilities from the LLP to the new LTD – this is best done under a contract and with the help of a legal professional
4. All members have to resign from the LLP – they can either become shareholders or enter a contract with the Limited Company if sole ownership is required
5. Dissolve the LLP – a majority of members have to agree to this or if there are only two members both need to be in agreement

We would recommend that you get advice from a solicitor and accountant before starting this process to ensure all is done correctly and runs smoothly.

If all this feels a bit daunting, you can hire a company formation agent, who can take care of it for you. Not only will this take off the pressure and stress of handling it yourself, but you can also be sure that everything is done the way it should be.

It might be the more costly option, but for the peace of mind, it’s worth it in our opinion.

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Make the right decision for your business

Why change from LLP to LTD can have a simple or more complex answer. If you’re the only member left, and you want to continue but without losing the liability protections, it’s a no-brainer.

Equally, if you want to attract investors that don’t want to become members, changing to a Limited Company is the only option to allow you to sell shares in your business.

But it’s not always that clear-cut. And for these cases you need to make sure that you make the right decision for your venture by considering what you would gain as well as lose.

Hopefully, this article has given you all you need to know to do what’s best for your business.