Limited Liability Partnerships – the basics

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Limited Liability Partnerships are what they say on the tin. They are a fairly new form of partnership which for the first time allows all partners to have limited liability.

Prior to 2000 businesses could be set up in 3 ways:

  • Sole trader
  • Partnership
  • Limited Company (or Limited liability company)
  • LLP – Limited Liability Partnership.

The most misunderstood one is possibly the LLP.  Key questions in this area are:

  • What are LLPs?
  • Would LLP apply to my business?
  • How would I gain?
  • What are the downsides?

What are LLPs?
Limited Liability Partnerships are what they say on the tin.  They are a fairly new form of partnership which for the first time allows all partners to have limited liability.

In a conventional partnership then any partner can be held liable for the partnership debts – without any upper limit.  With the exception of tax debts, this could mean that the partner who has some savings or property could end up losing the lot if things go bad.  Even if the partner with nothing contributes nothing.

It is this reason above many which has caused me in the past to advise people against setting up in partnership with anyone other than a spouse or blood relative. I used to advise them the only safe option was the Limited company.

Now with an LLP it is possible to be in partnership but without risking all that you own – much more attractive.

Setting up an LLP is fairly easy and like a limited company it should cost you less than £200.  The LLP is formed generally with the help of a company formation agent by applying to Companies House.  You need to have a name that is different from others and does not fall foul of various commonsense rules. See from Chapter 6 for guidance on names. Or any company formation firm will keep you right.

Would LLP apply to my business?

If you are currently operating as a sole trader and wish to go into partnership then a Limited Liability Partnership is well worth considering.

If you are currently trading as a partnership then there may be reasons why the LLP status is of benefit to you. For example reducing the risk taken by the partners.

Finally if you are not currently in business but thinking of setting-up, then LLP is one of the possible ways to go, and perhaps preferable in a number of ways to setting up a limited liability company.

How would I gain?
LLPs give you the flexibility and tax treatment of a partnership – better in a lot of ways than a company. (However this does mean you can pay higher rate tax if profits are good.)
You can go into business with another person and yet limit the amount of money you risk should things go wrong.
Your paperwork and administration will be a bit easier than with a company.  For example the business owners do not have to take PAYE tax and NIC from their income or money drawn from the business.
What are the downsides?
There is a bit more work and administration for your accountant than with a normal partnership.  For this reason they will probably charge a higher fee each year.

Accounts have to be filed each year, just like a company, with Companies House.  These are available for public inspection.  However do not worry too much about this.  Most businesses would be able to submit abbreviated information such as just a balance sheet, which does not show sales, expenses or profits.  Thus your nosy neighbour won’t be able to see how much money your business is bringing in.

For trades operated though LLPs there are restriction on losses set against other income to achieve tax savings.  The restriction does not apply to professions.
Setting up an LLP is not for everyone, but valuable for many.  Take professional advice before you make the big decision.
For more information on tax and LLPs read article Limited Liability Partnerships and tax

Huston’s Hint

An LLP is the safer way to go into partnership – especially if you are neither married to the new partner nor a relative. Partnerships are risky – this reduces the exposure.