This is the second part of Helen’s article on business formation and it covers Limited Liability Partnerships and Limited Companies. The first part of the article can be found here: Business Structure Part 1.
About the author: Helen Paull is a newly qualified solicitor at Lindleys specialising in company/commercial and commercial property matters.
Limited liability businesses
Limited Liability Partnership
An LLP is a relatively new structure when it comes to business formation. It combines the flexibility of a partnership with some of the protection offered by a company. It is more formal to set up than a normal partnership and requires registration at Companies House. It must also have at least two partners. This allows it to have a separate legal status from the partners and means it can enter into contracts and own property in its own right. Partners are referred to as ‘members’ of the LLP, they do not hold shares and have no obligation to contribute to the capital of the LLP.
Unfortunately, with the limitation of liability comes increased regulation. You are required to file an annual return and annual accounts with Companies House and notify them of every change in the LLP’s membership, as well as any legal charges granted over its assets. For a small fee this information is available to the public, a reason why some business owners prefer to retain the anonymity of a normal partnership.
The profits of an LLP are taxed as a partnership so each partner must submit an income tax return to HMRC to account for their share of the profits. The partners are able to agree how the profits will be divided, how decisions will be made, how and when new members are appointed and the circumstances in which a partner will retire. This can be set out in a private partnership agreement in the same way as a normal partnership. Many LLPs are professional businesses or semi-charitable businesses.
A Company provides the highest level of protection to shareholders and investors. It is registered with Companies House and must comply with the same filing requirements as apply to LLPs. Depending on the size of the company, full or abbreviated accounts will have to be filed at Companies House annually and are then publically available. This same transparency applies to the details of the directors and shareholders of the company. In return for this, the liability of shareholders is limited to the face value of the shares they own. A company can be formed by a single individual.
If they wish, this allows shareholders to simply act as investors and appoint directors to run the day to day affairs of the business and take the risk of personal liability. Many choose to act as directors of the company and take on the responsibility of running it. Unless they act outside their powers, are negligent or fraudulent then they will not have any personal liability for the company’s actions. A director can take a salary from the company and if they are a also a shareholder, they would be entitled to a proportion of any dividends issued.
If the business is likely to generate significant income then a company may be the best vehicle to minimise tax liability. Corporation tax is currently 20% on all profits up to £300,000*, significantly lower than the personal income tax rate on that amount! The optional issue of dividends means that some profit can be left in the company and distributed to the shareholders over a longer period of time. The initial 10% rate of tax* on dividends also makes it more tax efficient for any shareholders.
The expense of setting up and running a company means that it is not always the best vehicle for a start up business. There is, however, no reason that a business cannot change its structure as it grows, moving from a sole trader to a partnership to a company.
*correct at time of publication (November 2012)