LIMITED LIABILITY PARTNERSHIP
Set up and register a Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is similar to a normal partnership - but it also offers reduced personal responsibility for business debts. Unlike sole traders and partners of ordinary partnerships, the LLP itself - not the individual members - is responsible for any debts that it runs up, unless individual members have personally guaranteed a loan to the business. LLPs are more complicated to set up and run than ordinary partnerships, as they have to meet many of the same requirements as limited companies. LLPs are designed to be used by profit-making businesses. Non-profit making organisations should not use this business structure.
The members of an LLP
Any group of two or more people who want to set up a profit-making business together can form a limited liability partnership (LLP), unless one of them has previously been disqualified as a company director or LLP member. It is also possible for companies to be members of an LLP.
How many members should an LLP have?
An LLP must have at least two members, and at least two must be "designated" members.
The rights and responsibilities of LLP members
The members of an LLP normally share in both the responsibilities of running the business and the profits that it makes. Exactly how their rights and responsibilities are defined and divided depends on the LLP's partnership agreement or "deed of partnership". Designated members have some extra responsibilities on top of those of ordinary members.
The responsibilities of designated members
Designated members have to ensure that the LLP meets various legal obligations. These include making sure that the annual accounts and returns are properly signed and delivered to Companies House. They are also responsible for appointing auditors if necessary, and they act for the LLP if it is wound up or dissolved. Designated members are legally accountable if they fail to carry out their duties properly. If the LLP does not specify any designated members when it registers, then all its members will be treated as such.
You'll have to make flat-rate Class 2 National Insurance contributions (NICs) throughout the year - £2.10 a week in 2006/07 and £2.20 in 2007/08. Setting up a monthly direct debit is a good way to ensure you pay in time. If your annual profits are over a certain amount - £5,035 for the 2006/07 tax year, £5,225 for the 2007/08 tax year - you will have to pay Class 4 NICs. You pay these along with your income tax - the amount you have to pay is calculated from your self-assessment tax return.
Deed of partnership of an LLP
A deed of partnership is a legally binding agreement between the partners that are setting up in business together. It describes how the partnership will be run and the rights and duties of the members themselves. The deed of partnership is usually drawn up by a solicitor, who will consult with the partners about exactly what should be in it. It's not absolutely necessary to have a deed of partnership in order to set up a limited liability partnership (LLP), but it's a good idea as it will help to avoid misunderstandings and disputes between members in future. If the members do not have a deed, they will be governed by the terms of the Limited Partnership Act 2000, which does not offer solutions to many of the problems that can arise and may not suit the way that you and your members want to work together.
What does the deed of partnership cover?
As well as giving basic information about the partnership, such as its business name and the names of the partners, the deed will usually set out:
- the amount of capital that each partner is to contribute to the business
- the way in which profits are shared between partners, and whether any of the partners should be paid a salary
- working arrangements, such as how much time each partner should contribute to the business
- changes to the partnership, such as how new partners can be appointed and what happens if a partner dies or wishes to leave the partnership
Tax matters of an LLP
Profits are shared amongst members of a limited liability partnership (LLP), and individual members - not the LLP - pay income tax on these profits. Unlike limited companies, LLPs don't have to pay corporation tax. In most cases the members will be self-employed, so they must include details of any profits they get on their individual self assessment tax returns each year. Self-employed partners are also responsible for paying their own National Insurance contributions (NICs). It's important that each member of the partnership should register as self-employed with HM Revenue & Customs (HMRC). It is also possible for LLP members to be companies or other LLPs rather than individuals. If so, companies that are LLP members will have to pay corporation tax on their profits from the LLP and should include details of these on their self-assessment return for corporation tax. If the LLP has, or expects to have, turnover of more than £61,000 a year, it will need to charge VAT to its customers and pass this on to HMRC. LLPs with employees must collect and pay income tax and NICs from them, which means operating a PAYE system - see our guide on PAYE: the basics.
What does a new LLP need to do?
When you set up you must contact your local HMRC office to let them know the business exists. HMRC will send a Partnership Tax Return, which must be filled in to show the partnership's income and expenses for the tax year. The Partnership Tax Return includes a Partnership Statement, showing how profits or losses have been divided amongst the partners. The partnership should appoint one of its members - the "nominated" member - to fill in the Partnership Tax Return and return it to HMRC. They should also make sure that other members of the partnership are given copies of the Partnership Statement, to help them complete their own personal tax returns. Although the nominated member has responsibility for the Partnership Tax Return, all the members will have to pay any penalties that result from it being made late or incorrectly.
Naming your limited liability partnership
A limited liability partnership (LLP) can trade under the names of the partners, or some of the partners. You might choose to use an established business name of this kind if you are converting your ordinary partnership to an LLP. Alternatively you can use another business name, for example H & S LLP. The trading name should not be the same as or too similar to that of any business that already exists, and it should not contain words that people might find offensive or misleading. The name must end with "Limited Liability Partnership" or "LLP". You will need to obtain permission from the relevant professional bodies to use professional words, such as architect or solicitor, in your business name. You will also need to obtain permission to use words connected with public authorities, such as health, education, etc. You must make sure that your business stationery - such as letters and invoices - displays the trading name, the fact that it is an LLP, the place of registration, the registration number, and the address of the registered office.
Checklist: setting up and registering a limited liability partnership (LLP)
As well as registering your limited liability partnership (LLP) with Companies House, there are several other things that you need to do to put it on a proper legal footing and maintain its status. Make sure you:
- display your LLP's name on the outside of all its offices or other places of business
- display your LLP's name on all its business stationery, including letters, invoices, receipts and cheques
- show your LLP's place of registration, registered number and registered office address on all its business letters and order forms
- check that you've received a Certificate of Incorporation from Companies House
- inform HM Revenue & Customs (HMRC)
- send an annual tax return to HMRC
- send a set of accounts to Companies House every year
- send Companies House an annual return in order to keep your LLP's records up to date
- inform Companies House of any changes to your LLP's membership, the personal details of its members or the address of its registered office