When you are starting out in business, you have two options: to register as a private limited company (LTD) or as a limited liability partnership (LLP). Whichever you choose, the point is that you are limiting your liability should the company get into financial trouble.
Historically, “the professions” (lawyers, accountants, etc.) could not register private limited companies, so the LLP setup was created as an alternative way for them to limit their liability. Today, people working in those professions can choose either setup.
The type of company you choose to register depends on the work you are going to be doing, how many people will be involved and how much money you will be making. We hope the information in this article will help you to make the right decision for your business. If you have a question which is not answered here, please contact us.
|Use partner’s tax allowances||✓||✗|
|Employ non-professional staff||✗||✓|
|Run a large PAYE scheme||✗||✓|
|Be taxed as self-employed||✓||✗|
|Limit the liability of professional partners||✓||✗|
|Hold shares in another business||✓||✓|
|Maintain a steady business for a small or fixed number of partners||✓||✗|
|Expand the business and employ many people||✗||✓|
|Sell shares in the business||✗||✓|
In a traditional limited company, the directors are treated as employees of their own company. This means that their salary is subject to income tax, personal National Insurance and employers’ NI contributions. Profits left in the company are subject to corporation tax (a lower rate than income tax).
The up side of being a member of an LLP is that you are treated as self-employed when it comes to tax. This means that there are no employers’ National Insurance contributions, which could save you money.
The down side is that all profits are counted as the personal income of the members and are taxed at a higher rate than corporation tax.
So the balance of tax advantage depends on how much profit the company might make and how much the owners pay themselves. If you would like more information about this, please contact us.
Number of employees
If the company expects to employ people and the employees’ payroll is likely to be higher than the owners’ salary, a private company limited by shares is likely to be more tax efficient that a limited liability partnership.
If the business is likely to remain as just two or three members who are each making a similar contribution and each draw similar salaries then the LLP option will probably be more tax efficient.
It is wise to discuss the options with your tax accountant.
Selling your business
A private company limited by shares (LTD) is more anonymous and easier to separate from the owners by means of transferring the shares. A partnership is more personal and therefore less straight-forward to separate from the owners. Either way, if the business is good and profitable, someone will buy it. So the difference is in the administrative detail rather than the financial outcome.
Members of LLPs can either be individual people or companies (corporate members). Corporate membership can be a convenient method of linking the advantages of the LLP and Ltd formats. For more information about this option, please see our article on corporate members.
What if I change my mind?
There is no absolute rule that makes one format better than the other. If your business changes over the years so that a different format becomes more appropriate, it is possible to form a new company of the other type, then transfer the business over to the new company.