LLP vs ltd company: What’s the difference?
Both limited liability partnerships (LLPs) and limited companies limit the amount you lose if you go bust. But partners in an LLP earn money and pay tax separately. With a limited company, it’s the organisation that earns the money, then pays the owners salaries and dividends.
If you’re looking to set up a company with somebody else (or more than one person), you’ll need to decide whether that should be an LLP or a limited company. At first glance, they look pretty similar. Both have to be incorporated at Companies House, involve more admin than being a sole trader or traditional partnership, and have the word ‘limited’ in them. But there are big differences.
Let’s start with the basics.
What’s an LLP?
It’s a cross between a traditional partnership and a private limited company. An LLP is registered with Companies House, and the law sees it as separate from its owners – so it can own property and have debts. The owners are partners, and are jointly responsible for managing the business. There are no shares or shareholders.
What’s a limited company?
It’s a private company that’s completely separate from its owner. The owner can sell shares for profit and pay dividends to investors.
(You don’t actually need any pals to set up a limited company, just yourself – you can be both director and sole shareholder.)
What that means in practice
There are three major differences between LLPs and limited companies: the way you, as the owner, get paid; how you and your company pay tax; and what you owe if it goes bust.
The partners decide how they distribute the profits you make. So if one of you contributes more to the business (like working longer hours or bringing in more new clients), you can decide to pay them more. And if things change – one partner deciding to take a step back, for instance – it’s easy to restructure to reflect that.
- Limited company
You and any co-owners pay yourselves a salary and dividends. Dividends must come from your profits after tax, and will be the same amount per share. So if you and your partners have the same number of shares, you’ll take home the same amount in dividends.
HMRC treats all the profits your company makes as earnings for you and your partners. You pay income tax on those earnings. So you all need to register as self-employed with HMRC and fill in a tax return each year. And it might mean you pay more tax than if you become a limited company.
- Limited company
Your company pays corporation tax on the profits it makes. Then you pay income tax as an employee on any salary you pay yourself, and dividend tax on your, well, dividends.
If you go bust
When you start your LLP, you and your partners will agree each person’s individual liability. So, unlike a traditional partnership, if the business goes belly up you won’t be responsible for all the company’s debts – only what you agreed when you started out.
- Limited company
This type of business is ‘limited by shares’. That means that if things go horribly wrong, you can only lose the value of your shares (and not your house or the shirt off your back).
LLP vs limited company in action
Here are a couple of examples showing what this could look like in real life.
- Three solicitors team up. They recruit an office manager and someone to help with admin. They plan on keeping their practice fairly small. One of the partners might want to reduce his hours, then retire in the not-too-distant future.
An LLP would be the best option for these three. They don’t have many staff and aren’t looking to increase the size of the business. Because the structure’s flexible, they can pay the partner who plans to retire less as he cuts down his hours. And they can easily add another partner later if they want.
- An entrepreneur starts a travel company and asks two friends to join her – one’s an accountant and the other’s a marketing specialist. She recruits a team of staff and plans to quickly increase the size of the business.
Our intrepid entrepreneur would be best off as director and major shareholder of a limited company. Her partners get fewer shares to reflect the fact that they’re not contributing as much to the business. And she can also sell shares to investors to raise capital to put back in to it.
Changing your mind – converting an LLP to a limited company
If you and your partners set yourself up as an LLP and suddenly find you’re employing a lot of staff (or paying loads of tax), you can still convert to a limited company. First up you’ll all need to agree to transfer the partnership’s assets into a limited company structure. Then you’ll have to appoint directors and shareholders, and get yourself incorporated at Companies House.
In a nutshell
If you decide to become a limited company you’ll pay corporation tax on the money you make, and can sell shares in your company. The dividends you get will depend on the shares you own, as will your liability if something goes wrong.
If you want to become an LLP, you can’t sell shares in your company. But the structure’s flexible so you can easily change the way you and your partners get your money.