When it comes to taxes, many people remain unaware of their obligations and their allowances. The same applies to private limited companies and limited liability partnerships (LLPs). The question then arises, do limited liability partnerships pay corporation tax in the UK?
Before we answer this question, let’s discuss the difference between a private limited company and a limited liability partnership. This way, you will have a clearer understanding of how to proceed with managing one or the other.
What Qualifies as a Private Limited Company?
The primary goal behind setting up a limited company is to make a profit. Who owns said company? Well, that depends on who owns shares. They may be the people who manage the company, as in the directors. Or the shareholders, who do not partake in the daily business operations.
The following make up a private limited company:
- Company is a separate legal entity.
- Registration must be at Companies House, and they must file annual accounts.
- Even a single shareholder can own the company.
- Liability of a limited company does not exceed the value of its shares.
- Personal finances and company finances are separate.
Lastly, the company gets to keep profits after paying the corporation tax they owe.
How is a Limited Liability Partnership (LLP) Different from a Private Limited Company?
There are plenty of differences that we will dig into, but let’s talk about the similarity first. LLPs are also protectors, like private limited companies. By limiting their liability, they protect the assets of business owners. With LLPs, the limitation is to the extent of the investment of the members, as in the partners.
Now, for the obvious differences:
- The requirement for partnerships is at least two people. They are called designated members.
- Partnership Agreement mentions the rules for joining and leaving the partnership.
- There are no shares involved in partnerships.
- The total amount of investment made by the partners is the limitation for liability. This includes personal guarantees.
- Declaration of earnings of the members takes place through self-assessment. These are subject to Class 2 and 4 National Insurance as well as income tax.
How to Decide Between an LLP and a Private Limited Company
There are several factors to consider before coming to a decision. You should look at the number of people who are involved, the type of business you want or have, and the distribution of profit. Also, ponder the tax liabilities, structure of internal management which you want. To arrive at a wise choice, consider the options you prefer for keeping excess income and removing profits.
Reasons to Select a Company
In case your business is a non-profit organisation, your decision is easy. You can form a company limited by guarantee without any hesitation. The following are the reasons people choose a private limited company:
If you want to employ many people and their payroll goes above the salaries of the owners.
Or if you are looking to sell shares to raise capital.
Reasons to Opt for an LLP
Now, why should you for an LLP? For starters, it is an amazing alternative for any traditional partnership with a few members in terms of structure. Especially if the members draw similar profits and contribute comparably.
LLPs are of a significant advantage to those involved in high-risk services. Also, for any activity that is prone to claims for damages. Additionally, LLPs have a flexibility that makes them attractive to members.
| Advantages of an LLP | Advantages of a Limited Company |
|---|---|
|
You can appoint new members with ease |
Protect your personal finances |
|
There are no articles of association |
You can use PAYE |
|
You gain a professional reputation |
Helps you build a legacy |
|
Tax transparency |
You can issue shares and stocks |
Still, do limited liability partnerships pay corporation tax? First, let’s discuss how to form an LLP.
How Many People Will You Need to Form an LLP?
The minimum number of members required to form a limited liability partnership is 2. Nevertheless, you can do it all by yourself if you can set up a dormant company as your second member.
Steps to Form an LLP in the UK
Before you register for a new LLP, make sure you know who is qualified to do so. Let’s take the process step-by-step.
Do you Qualify for Registering a New LLP?
The good news is that anyone can set up an LLP. There is only one requirement. You are setting it up to make a profit. Of course, a minimum of two members is also a necessity. Members can include firms and companies.
The Process of Registration of an LLP
First, you must fill out a form by the name of Companies House (Form LL01). Then, apply this form by post. An alternate option is to do the entire process online through an authentic website.
The form requires a few details for registration, such as the following:
- A legal name for the LLP.
- Necessary details of the members (at least two, information may be public).
- An address which is registered, e.g., an office (public information).
You also need an LLP agreement that states how the LLP will work.
Rules for a Legal Name for LLP
Before you can give a name to your newly formed LLP, you must consider the following restrictions:
- A similar name to an existing organisation
- Any word that is offensive
Make sure the name you choose is not too close to a name that is already taken.
How Long Will It Take to Form an LLP in the UK?
You do not have to wait around to form an LLP. It takes between three to six hours to form an LLP with a Companies House. The timing may vary according to how busy they are. Use the online services provided by a company formation agent to get it all done.
Who is the Owner of an LLP?
Members of an LLP own it. There is no maximum limit to the number of members, only a minimum limit of two. However, do limited liability partnerships pay corporation tax? Let’s find out.
Who are the ‘Designated’ Members of an LLP?
At least two partners must register as ‘designated’ members to form an LLP. They will shoulder the managerial and administrative responsibilities of the LLP as well as the other members. If you fail to register two members as ‘designated’, then all partners are called designated members by law.
Do Limited Liability Partnerships Pay Corporation Tax in the UK?
Now, we can finally discuss if LLPs must pay corporation tax. Well, they neither file company tax returns nor pay corporation tax. So, what do they pay?
Well, they must register for VAT, under the condition their annual taxable turnover is beyond the threshold of £85,000 (2023/24 VAT registration threshold).
Since no corporation tax is due, every member is individually taxed on their share of the profits. Therefore, each member of an LLP must register themselves for Self-Assessment with HMRC. They must file a tax return every year, like clockwork. As a result, they pay National Insurance and Income tax on their personal income.
This is somewhat different from company directors, as they receive their earnings through the PAYE. Still, they need to register for Self-Assessment and file their tax returns. This applies if they get dividends from shares.
All members of an LLP must keep proper accounting records, as they are required to complete and submit tax returns. This answers the question, do limited liability partnerships pay corporation tax.
The Liability of LLPs in the UK
Limited liability of an LLP reduces the amount of money each member or partner must contribute toward debts and third-party claims. The LLP limits the liability of its members to the investment by the partners. This also includes any personal guarantees. The assets and finances of members are under protection beyond this threshold.
Surely, one of the main reasons to set up an LLP is its liability limit. As traditional partnerships have unlimited liability, the partners hold all the responsibility for debts.
Requirements for Filings of an LLP
LLPs need to file confirmation statements along with annual accounts to Companies House annually. Also, you must report any changes to their registered details to Companies House as soon as you can. Designated members must meet these requirements.
Members must file and submit their Self-Assessment tax returns to HMRC every year. Well, do limited liability partnerships pay corporation tax or not? Now, you know.
Is a Dormant LLP Possible?
The short answer is yes, an LLP can be dormant. There are conditions for it. If there are no substantial accounting transactions during an accounting term. Also, the LLP’s accounting records must state these transactions.
What is a Partnership Agreement?
A partnership agreement has all the necessary details of the LLP. Under the circumstance that some members hold more seniority, a partnership agreement must exist. It does not matter what title the members have.
This document states the powers, responsibilities, and duties of every partner involved in the LLP. Its purpose is to make sure that all every member agrees to their level of authority and role. Therefore, it helps prevent future conflicts and misunderstandings.
Conclusion
To summarise, forming an LLP is ideal for those who are already in a traditional partnership with a few members. You can register for an LLP through a Companies House and the good thing is, it does not take long. There are plenty of benefits to forming such a partnership. It is of utmost importance to fully understand the rules and regulations before forming one.
