Limited liability – limited company or LLP ?

Limited liability signifies where an investor’s financial liability is entirely limited to a fixed sum, most commonly the value of his initial investment. Limited liability is achieved through the creation of separate legal identity such as a company or limited liability partnership. These, unlike for instance sole traders or ordinary partnerships create a legal identity separate from that of its members (i.e. shareholders), affording certain degree of protection for members’ personal assets.

Limited Liability Companies

Private and public companies limited by shares are by far one of the most common forms of businesses in the UK. Private companies can be established and run by a single member, hence the so-called reference to a ‘one-man company’. Unlike private companies, public firms require more than 2 members, at least £50,000.00 worth of capital (i.e. issued fully paid shares) and offer a great opportunity to raise equity finance (i.e. offer shares to members of the public).

Advantages of LTDs

  • The main advantage of a limited liability company is that it limits investor’s liability to the amount of investment. Therefore, if you invested £10,000.00 in a business and it goes bankrupt, the creditors will not be able to sue you and get hold of your personal assets. Instead, they will have to sue the limited company.  In fact, in the case of insolvency you will be one of the unsecured creditors (as your investment money will be owed to you by the company).
  • Business continuity is another great feature of a limited company. Even after you or other members die, the company itself will still be operating and the shares can pass to your relatives.
  • There are also a number of taxation benefits that can serve those earning more than £37,400.00 per annum.

Disadvantages

Unfortunately, limited liability companies require slightly more detailed accounts and the rules governing bookkeeping are more restrictive than in the case of sole traders. The same applies to other administrative matters such as the need for maintenance of all relevant documentation such as annual returns, resolutions, director service contracts and up to date registers of members and directors. In addition, all records about limited liability companies are public. This means that you will lose certain level of confidentiality as directors’ details such as addresses can be easily accessed. Although limited companies can be tax efficient they also create a problem of double taxation where the profits are first taxed with the corporation tax and second tax (either income or dividend) is applied upon distribution of profits to the members.

Limited Liability Partnerships

LLP is a hybrid between a standard partnership and limited company. The idea behind LLPs is to preserve flexibility offered by partnerships and eliminate partners’ financial risk at the same time. LLPs are not as popular as limited companies but have found their niche in particular in professional sectors such as legal or accounting firms.

Advantages of an LLP

Majority of LLP’s advantages are similar to those of a limited liability company. However, one of the best and most distinct advantages of LLPs is taxation. LLPs allow the partners to avoid so-called double taxation that applies to limited companies.  Here, each partner pays income tax on their own shares. Moreover, partners are allowed to change division of profits as many times as they like without any interference from the HMRC.

Which one is better?

Both LLPs and LTDs offer great features for businesses. If you predict a lot of changes in the membership structure, LLP offers more flexible and less onerous procedures for exiting and entering partners. On the other hand, if your operations are small and structure is likely to stay the same, limited liability company will offer same benefits for less money. Finally, once your circumstances change you can always transfer the business over to newly formed legal entity.