There are several ways to set up a business in the UK, each with distinct advantages. Incorporating a business as a Limited Liability Company (LLP) or Private Limited Liability Company (corporation) are two common structures available where you want to better manage your risk and liability. This article compares the two.
Most appropriate structure
LLPs are often used by professionals who traditionally use partnership models, such as lawyers and accountants, while a corporation is the most popular form of business structure.
The legal part
A company is primarily governed by the Companies Act 2006. On the other hand, Limited Liability Companies are regulated by the Limited Liability Companies Act 2000 and associated regulations.
Both entities are formed by filing documents with Companies House. At least two initial members are required to create an LLP, while a corporation requires only one owner-manager. Once registered, each has ongoing regulatory requirements to file documents such as annual accounts with Companies House. All filed information is publicly available.
Each type of business must be managed in accordance with the respective legislation and the rules set out in any constitutional document specific to the entity.
For LLPs, members typically enter into a partnership agreement. It is a legally binding contract detailing the rights, duties and responsibilities of each member. Any partnership contract is a private and confidential document for the members.
A company is subject to its articles of association. The articles of association specify the operating rules of the Company and govern the rights, duties and obligations of the partners. Unlike partnership agreements for LLPs, articles of association are essential and the most recent version must be filed with Companies House, making them available to the public.
Generally, LLPs have more flexibility than a corporation when it comes to its management and profit sharing. Changes to the LLP are implemented by agreement between the members, while a company must comply with legal obligations to make certain changes. This includes evidence of board meetings and member decisions meeting certain thresholds. Certain amendments must be filed with Companies House.
Ownership and control
LLPs are owned and controlled by the members who invest in the entity. In contrast, the ownership of a company is divided into shares held by the shareholders, while the management is delegated to directors who do not need to be shareholders of the company.
The shares are obtained either by subscription to the Company for new shares, or by transfer of existing shares from current shareholders. Shareholders have the rights defined in the Company’s articles of association. These may include the rights to the distributable profits of the Company, the right to vote at meetings of the entity and the right to a share of the capital of the Company in the event of its liquidation on a solvent basis.
Both structures have a separate legal existence from their members. This allows members to operate with limited liability, which caps the amount of money each member must contribute to the entity’s debts, even if the business is liquidated.
LLPs are fiscally transparent. This means that instead of the LLP itself being taxed, members are responsible for paying tax on their share of the LLP’s profits. Contrast this with the position of a corporation, where the corporation itself pays corporation tax and capital gains tax on its taxable profits.