What are the main differences & tax liabilities of LLPs between limited companies?

Limited companies and LLPs share many similarities, most notably the reduced financial responsibility of the owners. However, they do have significant differences as well, namely:

• capital investment opportunities;
• flexibility of internal structure and members’ rights; and
• the allocation and taxation of business profits.

The main differences between a limited company and an LLP

• A limited company can be registered, owned and managed by just one individual – a sole person acting as both the director and shareholder (or guarantor). A minimum of two members are required to set up an LLP. However, one way around this is to set up a dormant limited company as the second LLP member.
• The liability of shareholders or guarantors is limited to the amount paid or unpaid on their shares, or the amount of their guarantees. The liability of LLP members is limited to the amount each member guarantees to pay if the business runs into financial difficulty or is wound up.
• A limited company can receive loans and capital investment from outside investors. An LLP can only receive loan capital. It cannot offer equity shares in the business to non-LLP members.
• Limited companies pay corporation tax and capital gains tax on all taxable income. LLP members pay income tax, National Insurance and capital gains tax on all taxable income. The LLP itself has no tax liability.
• It is easier to change the internal management structure and distribution of profits in an LLP.
• A limited company can be operated as a non-profit business. An LLP must be set up with the intention of making a profit.

Read more: File company tax return UK

Different tax liabilities of LLPs and limited companies

Limited company tax liability

All taxable income generated by a limited company is subject to corporation tax at 20%. Any salary a director receives will be liable for income tax, National Insurance and employers’ NI contributions. However, directors are often also shareholders. This means they are treated as employees of their own company. The distribution of profits to directors can be done in such a way that much of the money they receive is not subject to corporation tax or personal income tax.

LLP tax liability

A limited liability partnership (LLP) is a separate legal business structure that, at one and the same time, grants the benefits of limited liability while allowing the partnership's members to enjoy the flexibility of structuring the business as a partnership in the traditional sense. LLPs are intended for those businesses that carry on a profession or trade.
Just two LLP members are required to be held liable for filing LLP accounts and other secretarial duties.
If the LLP's members are not resident in the UK and the income of the LLP is derived from a non-UK source, then neither the LLP nor its members will be subject to UK taxation. So LLPs in the UK bring together a number of benefits.

• Limited liability protection
• Corporate status with unlimited capacity
• The ability of members to not only operate but also be taxed as a partnership

Consequently, an LLP in the UK is characterised by being a very flexible body for trade in the international market place which, if structured correctly, can escape being subject to taxation in the UK.

Read more:

• United Kingdom company formation
• Benefits of incorporation UK