A new trend observed late is that more and more entrepreneurs have started opting for Limited Liability Partnerships. But What is a Limited Liability Partnership?

Before answering this question, we’ll explain the reasons behind the emergence of LLP’s. A few years back, there used to be only two forms of Organisations.

1. Limited Liability Organizations, i.e. Companies

1. Unlimited Liability Partnerships, i.e. Partnership/ Proprietorship

Both these forms of organisations have their own plus and minuses. There is limited liability of the Owners in a Company as compared to Partnerships/Proprietorship which are easy to form and operate, but  Small Businesses & Professionals usually tend to opt for Partnerships as they are easy to form and operate.

However, as Businesses grew, there was a need for a form of organisation that was a hybrid between the two forms of organisations. Moreover, the rapid growth of the Service Sector created an environment and a demand for a new form of Organisation. Thus, the concept of Limited Liability Partnership was evolved, which incorporates the benefits of both Companies and Partnerships.

What is a Limited Liability Partnership?

A limited liability partnership (LLP) is a legal business structure. Professional firms such as solicitors and accountants often choose to set up limited liability partnerships, but the structure can also be a beneficial option for other types of business.

Limited liability partnerships differ from ‘traditional’ business partnerships and the limited company structure and are regulated by various legislation, including the Limited Liability Partnership Regulations, 2001.

Structure of an LLP

A limited liability partnership is a separate legal entity from its members (partners), who are only liable for the amount of money they invest, plus any personal guarantees. The partnership is incorporated at Companies House and can only be used by profit-making businesses.

Partners are required to provide a registered address for the business and maintain a register of members. There’s no restriction on the maximum number of partners allowed, but there must be at least two members on incorporation, either individuals or limited companies. It’s also possible to set up an LLP with one individual and a dormant company.

Differences between an LLP and other business structures

Traditional partnerships do not receive the same protection as LLPs. Partners can be held personally liable for debts incurred by the business if it is not incorporated into an LLP. Additionally, clients engage in company with the partners individually rather than the partnership as an entity.

Although limited liability partnerships and limited companies may appear to be similar at first glance, there are significant differences between the two:

1. Companies can be limited by guarantee, meaning non-profit organisations can use the structure. LLPs, on the other hand, are solely for profit-making businesses.

1. One person can set up a limited company and fulfil the role of shareholder and director. A limited liability partnership must consist of at least two ‘designated’ members who take responsibility for statutory filing and other legal requirements. Still, there can be an unlimited number of ‘ordinary’ members.

1. Limited companies pay corporation tax, but members of limited liability partnerships pay income tax through self-assessment.

1. The internal structure of a limited company is inflexible, whereas its members can change that of an LLP.

1. Limited companies can sell shares to secure capital investment, but limited liability partnerships do not have shares.