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How to set up a limited liability partnership

This discussion is for basic informational purpose only. No responsibility is taken and we urge you to seek professional advice before you attempt to set up a Limited Liability Partnership.

Limited Liability Partnership(LLP) is a new type of legal entity in the businss world giving limited liability. Originally targetes at professional partnership it now gives an extra choice in the way you can operate a business.

Many of the features available to a normal partnership still happen with an LLP. You still get the organizational flexibility and the taxation benefits. But along with that comes the reduction of personal responsibility for debts the business might incur. This is a similar protection given to shareholders of a limited company.

Because an LLP is classed as a separate legal entity it can hold property, enter into contracts, is responsible for any debts incurred and may sue or be sued in its own right. The situation in a traditional partnership differs in that the individual partners are held personally responsible.

Administration is increased in an LLP. As with limited Company meticulous records must be kept. The running of an LLP is more similar to a limited company rather than a traditional partnership.

Setting Up a Limited Liability Partnership
An LLP must be set up by two or more persons for the purpose of carrying on a lawful business intending to make a profit. A person can be an individual or a company. An LLP cannot be set up for the purpose of non-profit activities e.g. community service.

However, there is no requirement for directors or shareholder in a limited Liability Partnership as there id in a limited company. The Memorandum and Articles of Association are not required.

The partners are known as members, and at least two members are needed to form an LLP. A designated member is selected to be responsible for all communications with Companies House.

All Limited Liability Partnerships must be registered at Companies House.
To register you'll need:
  • A company name. Any name provided it isn't the name of an existing business, or close to it. It must not be misleading or offensive. Ending with 'Limited Liability Partnership' or 'LLP' is a requirement of the business name.
  • A minimum of two members
  • A registered office address. This address is where all statutory documents will be sent from Companies house. It must be a full UK postal address and will appear on public records. PO boxes are not allowed.
Set up and register your LLP directly with Companies House or register online with one of the many formation companies. These companies supply the standardized documents sufficient for most purposes and alleviate much of the administration work involved.

Also, consider the drawing up of a 'Deed of Partnership'. This legally binding agreement is between the members and spells out the individual rights, responsibilities and other details. Things like the amount of capital a member will inject into the partnership and what happens if a partner leaves the company are dealt with on this document.

Tax Matters
All profits in an LLP are split between members. Tax liability falls on the individual members and not the LLP itself. So most members are likely to be classed as self employed and all income declared via self-assessment. If a member should be a limited company, it will be liable to pay corporation tax on any income from the LLP.

Once the turnover (not profit) exceeds the threshold, you must register for VAT within 30 days. Currently the threshold is £60k in any twelve-month period. This is a legal requirement and registration is done at Her Majesty's Revenue and Customs (HMRC, formerly Inland Revenue).
You can register for VAT online. Even if good and services you supply are zero-rated you must register and then apply for an exemption.

Ongoing Administration
You will need to:
  • Maintain a full record of income, expenditure, assets and liabilities. Records must be kept in good order and secure as these will assist you in the annual requirement of making a report. All records must be kept for a minimum of seven full tax years.
  • Pay income tax and national insurance for all employees.
  • File annual accounts at Companies House. Each individual and the LLP itself must make annual self-assessment returns to HMRC (Formerly Inland Revenue). members are axed on their share of the profits and pay tax and national insurance contributions according to the business structure. The individual pays income tax plus NIC's and a limited company member will pay corporation tax.
  • Annual returns must be submitted to Companies House confirming member details such as addresses, and include the 'partnership statement' This shows how the profits were divided up amongst members.
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