Limited liability partnerships
The Limited Liability Partnership structure was created to combine some of the benefits of an Ordinary Partnership with the limited liability that comes with being an incorporated business. This means that the partnership is treated as its own legal entity and can sign documents, enter agreements, and even be sued (in worse-case scenarios). To do this, the business must be registered with Companies House.
In an LLP, partners are known as ‘members’ and are free to organise their internal structure as suits their business. Like an ordinary partnership, members will produce an agreement saying how profits will be shared, the process of admitting new members, management and decision-making responsibilities, the retirement or expulsion process and the entitlements/obligations of former members.
As with ordinary partnerships, members are treated as being self-employed and submit individual self-assessed tax returns on their share of the profits. However, because of the limited liability, LLPs must prepare and publish accounts which are visible to the public. On one hand, this removes the privacy that protects sole traders and ordinary partnerships but on the other hand, this can make it easier to raise capital as banks and lenders can see how a business is performing.
Essentials Tip: who and why?
Limited Liability Partnerships are popular among professionals. Lawyers, accountants, and doctors often form LLPs to protect the member’s personal assets from the liabilities of the business. This means that if there are any debts rather than being liable for the whole amount, members are only responsible for their initial share.
- Limited Liability Partnerships keep the flexibility and control of an ordinary partnership
- Members get Limited Company liabilities protection
- Profits are shared between members
- More formal accounting requirements make it easier to raise finance from lenders
- Disagreements between members on business decisions can happen
- There are costs to setting and registering the partnership
- Limited Partnerships must prepare and publish annual accounts
- Accounts are visible to the public
Accounting
Two members must act as ‘designated members’ and are responsible for filing and submitting the annual accounts to Companies House.
These must include:
These accounts must also be shared with every member of the partnership and any finance provider who has loaned money to the partnership.
The accounting year runs from the last day of the month when the partnership was first incorporated. This means the financial year for a company first incorporated on the 11th May, 2023 would end on 31st May, 2024.
LLPs have 9 months to submit their accounts to Company House following the end of their financial year.
paying tax
Partners are treated as being self-employed by HMRC.
Partners pay income tax and Class 2 National Insurance contributions on their share of the profits to HMRC via the self-assessment system. The Tax year runs from April 6th to April 5th of the following year.
The tax is usually paid in two instalments, no later than January 31 & July 31 of the following tax year.
INCOME TAX
Individuals and sole traders are given a Personal Allowance that they can earn each year that is not taxable.
| Income Tax Rates & Thresholds (England, Wales and Northern Ireland) | ||
|---|---|---|
| Rate | 2021 – 2026 | |
| Personal Allowance | 0% | First £12,570 |
| Base Rate | 20% | £12,571 – £50,270 |
| Higher Rate | 40% | £50,271 – £125,140 |
| Additional Rate | 45% | Over £125,140 |
| Income Tax Rates & Thresholds (Scotland) | ||
|---|---|---|
| Rate | 2023/24 | |
| Personal Allowance | 0% | £0 – £12,570 |
| Starter Rate | 19% | £12,571 – £14,732 |
| Scottish Basic Rate | 20% | £14,733 – £25,688 |
| Intermediate Rate | 21% | £25,689 – £43,662 |
| Higher Rate | 42% | £43,663 – £125,140 |
| Top Rate | 47% | Above £125,140 |
Individuals and sole traders with earnings over £100,000 will see a reduction to their Personal Allowance by £1 for every £2 of income above the £100,000 limit. This means anyone with an income over £125,000 does not have a Personal Allowance.
National insurance
Anyone who is self-employed with profits of £12,570 or more a year will pay the Class 2 and Class 4 National Insurance rates. These are:
| Self-Employed National Insurance Rates | |
|---|---|
| Class 4 | £3.45 a week |
| Class 4 | 9% on profits between £12,570 and £50,270 (between the Lower and Upper Profits Limit) |
| Class 4 | 2% on profits over £50,270 (above the Upper Profits Limits) |
If their profits fall below the Small Profits Threshold (£6,725 in 2023/24), someone who is self-employed will not have to pay Class 2 National Insurance.