General, limited and limited liability partnerships are available in the UK. General partnerships are unincorporated partnerships where the partners have an unlimited liability for the debts and obligations of the partnership. Limited partnerships are similarly incorporated, but there is at least one general partner (which can be a limited liability company) with unlimited liability and the limited partners only have liability up to their capital contribution.
Almost all forms of business can take the form of a partnership, where two or more partners carry on a business together with a view to profit. Although partnerships are not as regulated as companies, it is in practice not as frequently used for business ventures in the UK as the liability of partners is generally unlimited. The partnership is also not a legal vehicle in its own right and the structure is in some respects, cumbersome.
The limited liability partnership (“LLP”) was issued as a new type of vehicle in 2001. LLPs have the advantage of a legal personality separate from that of their members and generally have the benefit of limited liability for members where as a body corporate, its profits, assets and liabilities belong to the LLP rather than to its members. Much of the existing company legislation set out in the Companies Acts, the Insolvency Act 1986 and the Company Directors Disqualification Act 1986 also applies to the LLP.
All of the Companies Acts provisions on financial disclosure applied to companies also apply to the LLP other than those relating to share capital. The Limited Liability Partnership Act 2000 and the Limited Liability Partnership Regulations 2001 also apply many of the other company disclosure requirements to LLPs, in particular:
- The LLP must have a registered office and any change in the office must be notified to the Companies House; and
- The LLP is required to deliver an annual return to the Companies House containing specific details in relation to the LLP, including the list of names and the usual residential addresses of the members, including the list of designated members.
For UK tax purposes, LLPs are transparent and therefore tax is assessed on the members individually rather than on the LLP. Where a foreign company enters into a partnership with existing business entities either through a foreign or UK LLP, the foreign company will usually be treated as having a permanent establishment in the UK through the agency with its UK partners (if it does not have a permanent establishment in its own right) and will therefore be subject to UK corporation tax on its share of the profits of the LLP.
Members of the LLP
A member of an LLP may be any natural or legal person, eg an individual, a company or another LLP, and there is no limit on the number of members that an LLP may have.
Members are those who subscribe upon the registration of the LLP and who join subsequently with the agreement of existing members. Partnership of the LLP ceases upon the retirement or death of the relevant member, the dissolution of the LLP or by agreement of the members.
There is also a separate class of members called “designated” members who are appointed upon incorporation or by agreement amongst the members. Designated members are responsible for ensuring compliance by the LLP with procedural and administrative requirement, and might be compared to company secretaries. If there were fewer than two designated members appointed, every member would be deemed to be a designated member.
Advantages offered by the LLP include:
An LLP agreement can be a lot more flexible than a private limited company’s shareholders’ agreement. This allows more flexibility in terms of what profits are allocated to individual members of an LLP on a year on year basis. In addition, it is often easier for current employees of a limited company to be made members of an LLP and participate in the growth of the business, than to implement often complicated share scheme arrangements.
Because individual members of an LLP are self-employed, they are subject to different National Insurance (“NI”) rules than those applicable to employees. The NI liabilities for self-employed individuals are significantly less than those for employees.
For individual members of an LLP no Pay As You Earn (“PAYE”) obligations are due, and instead tax is not payable until 31 January after the end of the tax year.
The requirements for an interest in a LLP to qualify for Entrepreneurs’ Relief are less onerous than that of a share disposal. Therefore, there are more opportunities for an individual to benefit from Entrepreneurs’ Relief on the disposal of an interest in an LLP, compared to a minority shareholder in a company. This is of particular benefit for persons with less than a 5% interest.
The establishment of a private limited company or a LLP is a popular method for foreign investors seeking to establish a presence in the UK. The key differences between both these entities are set out below:
- The LLP does not have a memorandum or Articles of Association; it is governed by its private agreement which may be amended as and when required;
- The LLP does not have share capital and is instead owned by its members through their capital shares;
- The LLP may have profit sharing members who do not have a capital share in the LLP; and
- The LLP is transparent for direct tax purposes.