A prospective client asked me the difference between an LLP and a Limited company (Ltd), and what were the pros and cons of each. Perhaps the most important similarity between the two is that they have limited liability to the members and shareholders respectively.
The other similarity is that they are both registered at Companies House and two returns must be made each year:
- Annual return – confirmation of details of directors, shareholders, members, registered office etc
- Annual accounts – for smaller companies a thinned down abbreviated set of accounts can be filed
Otherwise they are really quite different:
- LLPs are governed by a partnership agreement which should be written but in many cases is not, so relies on history or verbal agreement. This governs all aspects of running the company including share of profits between the members (the name of partners in an LLP). The profits are assessed on the members of the LLP, so if they are individuals they are taxed as self employed individuals paying tax and Class 4 NI.
- Ltds are governed by the memorandum and articles of association which are issued when the company is formed. Tax is payable on the profits of the company at 20% for smaller companies. Directors are often paid a salary which is tax deductible just like any employee. The shareholders (who may also be directors) may be paid a dividend providing there are profit reserves available to do so. Depending on the structure there are some quite large personal tax advantages to being a director/shareholder in a Ltd company
In summary an LLP is significantly more flexible as a structure for distributing profits where variable amounts need to be allocated each year. A Ltd by contrast has a fixed profit distribution based the share ownership in the company, but is potentially a better tax saving structure.
This article only covers some of the basics so you should seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting, Gravesend, Kent – Accountants who “speak your language”