Starting a business can be both an exciting and daunting task. It’s a chance to be your boss, set your hours, and bring your vision to life. But it’s also a lot of work, and there are a lot of important decisions to make along the way. One of the key decisions you will need to make is what legal structure to choose for your business as it will determine things like how much tax you pay, your liability, and the amount of paperwork you need to do.
There are many different business structures that a company can choose from, each with its own set of advantages and disadvantages. However, two of the most common are the Limited Liability Partnership (LLP) and the Limited Company ( Ltd). This article will examine all the differences between these two in detail so that you can make an informed decision about which is best for your company.
Ownership Structure
The first and perhaps most obvious difference between LLP and Ltd is their ownership structure. An LLP is a partnership between two or more people, while an Ltd is a company that is owned by shareholders. This means that if you choose to set up an LLP, you will be in business with one or more partners and will share profits, losses, and liabilities with them. If you choose to set up an Ltd, you will be the sole owner of the company and will not have any partners. You may still hire employees, but they will not be owners of the company. And if the business fails, you will not be held liable for any debts.
Formation
An LLP is relatively easy to set up – you just need to register with Companies House and create a partnership agreement. An Ltd, on the other hand, is a little more complicated. You will need to file articles of incorporation with the government, and set up a shareholders agreement. This means that if you want to start an Ltd, you will need to have a few more things in place before you can get started. However, the easiest way to ensure you are compliant with all the legal requirements is to use a formation agent like company formation experts. As experts from Uniwide Formation have noted, these agents can take care of everything for you, from filing the necessary paperwork to set up your business bank account. You may even finish everything in as little as 24 hours, so it’s worth considering if the time is of the essence.
Tax
The tax treatment of LLP and Ltd businesses is also quite different. An LLP is taxed as a partnership, which means that each partner will pay tax on their share of the profits at their individual income tax rate. An Ltd, on the other hand, is taxed as a company and will pay corporation tax on its profits at a flat rate of 19%. This can be an advantage if your business is making a lot of money as you will get to keep more of it after tax. And if your business is making a loss, you can offset this against your other income to reduce your overall tax bill. However, it’s worth bearing in mind that companies also have to pay dividend taxes on any dividends they distribute to shareholders, which can offset some of this advantage.
Liability
Partners in an LLP are jointly and severally liable for the debts of the business, which means that each partner is individually responsible for the whole debt. This can be a disadvantage as it means that if the business gets into financial trouble, partners could end up having to sell their assets to pay off creditors. However, partners are only liable for debts up to the amount they have invested in the business. So, if you have invested £50,000 in an LLP and the business owes £100,000, you would only be liable for half of the debt. Shareholders in an Ltd, on the other hand, are only liable for the debts of the company up to the amount they have invested. This means that if the company gets into debt, shareholders will not be personally liable and will only lose the money they have invested in the company.
Management
LLPs are managed by partners, while Ltd is managed by directors. This means that if you set up an LLP, you will be involved in the day-to-day running of the business. If you set up an Ltd, you can appoint directors to run the company on your behalf. Directors can be shareholders or employees of the company, but they don’t have to be. This can be an advantage if you want to take a hands-off approach to the running of your business. However, keep in mind that directors have a legal duty to act in the best interests of the company and its shareholders, so you will need to choose carefully who you appoint. And while directors can be removed by shareholders, this can be a complicated and costly process.
Funding
LLPs and Ltd can both be funded in a variety of ways, including loans, investments, and grants. However, there are some key differences to bear in mind. For example, if you set up an LLP, you will need to find partners who are willing to invest money in the business. You can even get partners to invest their time and expertise, which can be a valuable form of investment. However, finding partners can be difficult, and you will need to agree on how profits will be shared. If you set up an Ltd, you will need to either find investors or take out a bank loan. It’s also worth noting that LLCs can issue shares to raise capital, while LLPs cannot. So depending on the way you want to fund your business, one structure might be more advantageous than the other.
While there are some key differences between LLP and Ltd businesses, there is no right or wrong answer when it comes to choosing which one to set up. It all depends on your circumstances and what’s best for your business. So if you are ready to start the new chapter in your business journey, make sure you take the time to think about the above-mentioned key differences to ensure you choose the right business structure for your needs. If you have any further questions, don’t hesitate to get in touch with business law solicitors who can advise you on the best course of action for your business.
