The Basics of Limited Liability Partnership: An Overview

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5/01/2016 by
alanloyed

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There are various ways to form a business and one of the most common ways to form them is LLP or limited liability partnership. In this type of business structure, two or more than two people come together for operating a business. There are several reasons that make people opt for this structure of business.

The Limited Liability Partnerships Act 2000 came into operation in April 2001. The chief purpose behind it is introduction of a new form of legal entity known as limited liability partnership or LLP. This is the best setup for professions that usually operate as traditional partnership like accountancy firms, dental practices and solicitors. It incorporates several characteristics of normal partnership structure in the guise of internal management layout, tax liability and profit distribution. However, this includes an added benefit in the form of reduced financial liability or limited liability for the business partners.

Overview of LLP

Limited liability partnership or LLP is akin to normal business partnership but as already said, it offers reduced personal liability for the business debts. The partners in LLP are not liable personally for the debts that businesses fail to pay. The liability of the partners is limited to the amount of money they invested in business. The responsibility of the partners and the share of profits are set out in an agreement.

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How is an LLP Different from a Traditional Partnership?

Partnerships are a type of business structure set up by two or more than two people. They can be registered either as a traditional partnership or an LLP. The prime difference between the two is the level of financial accountability. The traditional partnerships place the complete burden of business debt on the partners. The LLPs, on the other hand, place reduced financial liability on the partners. It is easy to guess that this is a much more desirable option.

Tax for Limited Liability Partnership

Every year, the partnerships are required to send partnership Self-Assessment tax return to the HMRC or HM Revenue and Customs. All the partners are required to

  • Send in personal self-assessment tax return
  • Pay National Insurance
  • Pay income tax on their share of partnership profit

For the purpose of taxation, LLPs are treated as a partnership and the members are treated as partners. The profits here are taxed under the rules applicable to the members that is income tax, capital gains and National Insurance for the individual members. For the corporate members, corporation tax is charged.

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Let’s have a look at the advantages of Limited Liability Partnerships now.

  • Ease in Establishment

An LLP can be formed quickly and at a cost effective rate. Same day incorporation is also a possibility. There is no need to file or prepare any written agreement on the operation of LLP. However, most members prefer to have a written agreement. There are a few default provisions in LLP regulations and this may cause unintended consequences.

  • Management and Ownership Flexibility

The members can decide how the LLP is to be managed, the way capital will be owned and the profits shared. The arrangements are possible to change simply by an agreement. Succession planning is easy within LLP as compared to the processes that are to be followed for transfer or issue of shares in an enterprise.

  • Participation

In most instances, it is simpler to admit new members to LLP as compared to issuing new shares. This will make space for wider participation which in turn will stimulate a better sense of loyalty as well as responsibility towards business.

The agreement between the members can also be drafted especially to deal with the withdrawal processes from partnership, thereby making a provision for greater organisational flexibility.

  • Tax Advantage

In an LLP, the members are taxed on their profit shares directly. There is usually no tax charged when a member is introduced or the members leave. This compares quite favourably with the tax treatment of employee shares in a given organisation. There can also be savings in the National Insurance contributions.

LLPs are flexible tax as well as legal entities that allow the partners to benefit by working together while reducing liability. If you have any trouble, check things out with a lawyer or a company formation agent.








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Allan Lloyd has more than five years of experience as a content developer. A web enthusiast, he has a penchant for framing content for diverse industries. He has framed content for different blogging platforms. His areas of interest include health, business, news, entertainment and home improvement. He frames informative write ups and tries to make all of them interesting for the readers.

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