Ltd or LLP – What Is The Difference?

Just recently I have been asked about setting up an LLP (Limited Liability Partnership) for a potential client. Very quickly it became obvious that there was a misconception about terminology. They were asking about an LLP but things that were being mentioned referred directly to a Limited Company.

So what is the difference?

There are actually more similarities than differences. They are both formed through Companies House. They both give the owners the benefit of limited liability. They both have to file accounts on public record. They both have a formal legal framework. They both have to file an annual return showing the names and addresses of members. They both have penalties for late filing of accounts. They both stand to lose their assets if they are struck off the register. They both need to appoint an auditor if their size is above the exempt limits. They both have legal charges and mortgages registered on public record. They both have a registered office.

The main difference is that the members of a limited company buy shares and their liability is limited to the amount they pay for the shares. A member of an LLP is liable for the amount of money they have invested in the business – sometimes a substantial amount of money.

Another fundamental difference is that officers of a company are employed by the company under PAYE rules. Members of an LLP are self employed.

The last big difference is the cost of setting up. A Limited company can be formed for £24.99 or even free in some cases. An LLP though is simple to set up but requires a formal partnership deed writing by a solicitor to deal with all necessary aspects of the life of the LLP from amount of capital needed from each member, to conflict resolution, to what will happen when a member wants to leave or even when one dies. These deeds can cost upwards of £1,000 but make the life of the LLP much smoother for all the members.

The concept of LLP was framed by the big firms of accountants a few years ago. They wanted to find a way to limit their liability to their clients and other interested 3rd parties but could not just form Ltd companys as under the law, a company cannot be appointed as an auditor. The LLP was born to satisfy this need and is why most LLP’s are accountants or legal businesses. An average person finds the Ltd company more than suitable for most needs and relatively cheap to buy and run. If a partnership is preferred then a normal partnership is more than sufficient – although a formal partnership deed is still a good idea.

I hope this quick explanation clears a few questions about the similarities and differences between Ltd companies and LLP’s but please do not hesitate to contact me if you have any questions about the best form of business vehicle for your own circumstances.

~Ray