When it comes to choosing the appropriate business structure for your new venture in the UK, one of the most important considerations is protection from potential liability associated with the business. Most new business owners start their venture as a sole proprietorship, trading under their own name.
While a sole proprietorship offers the simplest form of business organisation, it also has many disadvantages. The main disadvantage associated with a sole proprietorship is unlimited liability. In other words, there is no separation between the owner’s personal and business assets.
Limited liability partnerships are a relatively new business structure that aim to combine the tax and personal liability advantages of a corporation with the flexibility of a partnership. As a result, the LLP business structure provides protection from unlimited liability. With that in mind, is it the right choice for your business?
The Pros and Cons of a Limited Liability Partnership (LLP)
The Pros
Pro #1: Personal Liability Protection
The main advantage of an LLP is the protection from unlimited personal liability for the business’ debts. By separating ownership interests into a limited and general partnership, individuals can limit their liability exposure to the amount of their capital contribution and any unpaid debt.
In the event that a creditor obtains a judgment against the LLP, it will only be able to pursue the debts and actions of the partnership. It will not be able to pursue the owner’s personal assets if the owner has contributed the minimum capital required under the LLP’s governing documents.
Pro #2: Flexible Management Structure
In most corporate forms of ownership, the board of directors is responsible for setting and implementing the day-to-day management of the corporation and all of its activities. However, in an LLP, the general partners have absolute control over the management and operation of the business.
Specifically, the general partners determine the legal, tax, and operational structure of the business. They also have the power to bind the partnership in contracts and generally manage its daily activities.
Pro #3: Pass-Through Taxation
In a limited liability partnership, the partnership itself does not pay any income tax. Rather, the income or loss of the business passes through to the partners based on their ownership interests. In this way, partners are able to deduct business losses from their individual gross income when filing their personal income tax returns.
The Cons
Con #1: Difficulty Raising Capital
As a new business, finding funding for its activities can be the single greatest challenge facing its founders. In the early stages of business, the easiest way to raise capital is to have one or more of the owners contribute their personal wealth to the company.
However, raising capital through the partnership structure can be extremely difficult. It’s important to remember that the general partners have absolute control over the business. In addition, investors in a partnership are limited in the amount of leverage they can obtain for their investment.
Con #2: More Complicated and Expensive to Set Up
In addition to the high costs associated with an LLP, setting up a limited liability partnership is significantly more complicated than a sole proprietorship or a limited company. I
Con #3: Limited Lifespan
Another downside to the LLP is that it has a defined lifespan. Unlike a corporation, which can continue to exist indefinitely, the LLP is a temporary structure. Once any of the partners dies or retires, the LLP dissolves and reverts to a standard partnership.
The Bottom Line: Is LLP the Right Business Structure For You?
The decision to form a limited liability partnership is not one to be taken lightly. As previously discussed, it does offer some distinct advantages over other business structures. It also provides the owner with personal liability protection that is not available in sole proprietorships and limited companies.
However, the potential disadvantages must also be considered. Limited liability partnerships are more complicated to establish and require a much higher initial investment than a sole proprietorship.
If you’re still interested in setting up an LLP, you should consider first consulting with a qualified attorney or accountant. They can help you properly set up the LLP structure and offer advice regarding the business’ activities and tax status.
Do You Want to Know More About the Limited Company Corporation Tax in the UK?
If you would like to know what it takes to set up a limited company corporation in the UK and how you can use it for your small business, get in touch with our expert accountants at Accountants247 Golders Green!