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Limited liability partnerships (LLPs) were first introduced in April 2001 and are becoming an increasingly popular way of structuring a business, especially with professional practices.
The big advantage of the LLP is that it allows the liability of partners to be limited. In ‘normal’ (unlimited) partnerships, the liabilities of the partners are unlimited, so the risks can, effectively, be ‘open-ended’. All business involves a degree of risk so using a business vehicle that limits the liability of the partners may be a good idea.
However, if you do decide to form an LLP, do not expect your bank to do nothing. It is likely to insist that any loans or overdrafts are individually guaranteed by the partners. Some of your trade suppliers may also seek to reduce their credit limits or ask for guarantees.
The first thing to be clear about regarding an LLP is that it is a partnership and is taxed as such while trading. It is not taxed like a limited company. The taxation of LLPs has been arranged to make transferring from an ordinary partnership to a limited one quite straightforward. On the winding up of an LLP, however, it is taxed like a company.
An LLP is set up by applying to the Registrar of Companies in much the same way as one would to set up a limited company. The regulations attaching to LLPs as regards disclosure requirements, filing requirements and so on are similar to those for companies. For example, the business stationery must carry the registered office address, name and number. Annual returns must be submitted to Companies House.
Information on the procedures necessary to set up an LLP can be found here. The Limited Liability Partnerships Act 200 can be accessed here.
The equivalent of the director of a company is the ‘designated member’ of the partnership, of whom there must be at least two. The partnership’s ‘rules’ are contained in an agreement, which will also specify how much each member would have to contribute in a winding up.
Like companies, LLPs must file accounts at Companies House and disclose similar information to companies.
The advantages of the limitation of liability of an LLP in protecting partners’ personal assets must be balanced against the greater level of disclosure of information required and the possible reduction in availability of trade credit.