When you start out in business, you want to make sure you’re choosing the right company set-up. For example, will you choose a company limited by shares or an LLP? If you’re doing charitable work, will a CIO be preferable to a charitable company, or what about a CIC?
When you register your company with Companies House, you are creating a new legal entity and protecting yourself financially (limiting your liability – that’s why it’s called a ‘limited company’). In an LLP, all the partners (there must be at least two but there is no upper limit) are equal members and their liability is limited. The amount they invest in the business is a private matter agreed between the partners. Because that money is invested in their business, if something should go wrong, they are not liable to pay the debts of the business.
The structure of a limited partnership (LP) is slightly different. In this type of business, there must be at least one ‘general partner’ and one ‘limited partner’. It is important to be aware of what these mean.
- The general partner is in charge of the day-to-day running of the business and makes decisions for the business.
- The limited partner contributes an amount of money or property to the business when it’s set up, but cannot make decisions for the business.
Here’s the key: the liability of the limited partner is limited (the clue is in the name!), but the general partner is liable for any debts the business can’t pay. The amount the limited partner contributes on incorporation is not a nominal amount (e.g. £10, as can be done for a limited by shares or by guarantee company); it is a significant sum, which will be used by the general partner to run the business.
For some businesses this is the appropriate set-up, but for many it isn’t. For most businesses, it is more appropriate to limit the liability of all partners, directors, trustees, etc. and this is the main reason people choose to register their company.
If you have any questions about this or are unsure about which type of company will be most suitable for your business, please contact us.