LLPs vs Private Limited Companies
20th January 2010 by: Alexander Egerton and Moshe Moses
When starting a new business it is important to consider through which entity to operate.
Many operators consider either forming a Limited Liability Partnership or a Private Limited Company.
An LLP is a body corporate with a legal personality separate from that of its members. It must by definition have two members. A company divides it owners (the shareholders) from its managers (the directors) but a member of a LLP owns and manages the LLP.
Whereas a company has to publicly disclose its constitution (articles of association) the LLP agreement (the document regulating the members’ relationship) is a private document. If a LLP does not have this in place its assets affairs are governed by a 2001 statutory instrument. These default provisions are far from suitable – for example, there is no right to expel and all assets of the LLP are shared by the members equally.
As a LLP is a legal entity (unlike a partnership) a LLP can grant security over its assets. The LLP owns the assets of the business and is liable for its own debts. The members act as its agents and only have liability up to the amount they have contributed to the LLP.
There are three aspects of a LLP which can make LLPs attractive choices as business vehicles:
although treated as a separate legal entity from its members, the LLP is treated for tax purposes as a partnership and the members are taxed as partners, each being liable for tax on their share of the income or gains of the LLP. Whereas a company will (as a taxable entity) be taxed on its profits with the shareholder then paying tax on the dividends they receive, any profits the LLP may make are taxed in the members’ hands as income.
There are certain tax reliefs available for people investing in LLPs; unlike companies, LLPs have no share capital and LLPs are not subject to any rules of capital maintenance.
A company has to follow certain procedures governing its administration – e.g. the obtaining of shareholders’ consent for certain transactions. The 2006 Companies Act only makes these procedures more palatable. The LLP will only be governed by the procedures set out in the LLP agreement. These can be made as flexible or prescriptive as the members choose.
However LLP’s cannot enjoy the tax advantages of trading as a corporate group (i.e. the substantial shareholder exemption which allows companies in a group to trade amongst themselves without those transactions being taxed).
The choice whether to trade as a LLP or a company will be dictated by the tax consequences.
Many operators consider either forming a Limited Liability Partnership or a Private Limited Company.
An LLP is a body corporate with a legal personality separate from that of its members. It must by definition have two members. A company divides it owners (the shareholders) from its managers (the directors) but a member of a LLP owns and manages the LLP.
Whereas a company has to publicly disclose its constitution (articles of association) the LLP agreement (the document regulating the members’ relationship) is a private document. If a LLP does not have this in place its assets affairs are governed by a 2001 statutory instrument. These default provisions are far from suitable – for example, there is no right to expel and all assets of the LLP are shared by the members equally.
As a LLP is a legal entity (unlike a partnership) a LLP can grant security over its assets. The LLP owns the assets of the business and is liable for its own debts. The members act as its agents and only have liability up to the amount they have contributed to the LLP.
There are three aspects of a LLP which can make LLPs attractive choices as business vehicles:
although treated as a separate legal entity from its members, the LLP is treated for tax purposes as a partnership and the members are taxed as partners, each being liable for tax on their share of the income or gains of the LLP. Whereas a company will (as a taxable entity) be taxed on its profits with the shareholder then paying tax on the dividends they receive, any profits the LLP may make are taxed in the members’ hands as income.
There are certain tax reliefs available for people investing in LLPs; unlike companies, LLPs have no share capital and LLPs are not subject to any rules of capital maintenance.
A company has to follow certain procedures governing its administration – e.g. the obtaining of shareholders’ consent for certain transactions. The 2006 Companies Act only makes these procedures more palatable. The LLP will only be governed by the procedures set out in the LLP agreement. These can be made as flexible or prescriptive as the members choose.
However LLP’s cannot enjoy the tax advantages of trading as a corporate group (i.e. the substantial shareholder exemption which allows companies in a group to trade amongst themselves without those transactions being taxed).
The choice whether to trade as a LLP or a company will be dictated by the tax consequences.
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