What is a Company's Structure?
When incorporating your new business there are plenty of questions that you ask yourself about how you are going to start your new business but one question that may get over looked is what structure best suits my new company.
In the UK there are 4 types of company structures for you to choose; Sole trader, Partnership, Limited Liability Partnership (LLP) and a Limited Company (LTD), each of these company structures come with varying pros and cons. This article is tailored more towards the differences between a LLP and a Limited Company but if you wish to read in further detail about the other types of company structures I recommend reading: Choosing the right business structure.
What does it mean to be Limited?
For a company to be limited it means that there is limited liability. This status of limited liability means the company/partnership is an entity of its own legal right. This means the company is legally distinct from the people who run it and that the company’s finances are kept completely separately from the owners’ personal finances.
Simply put, if the company makes a loss the directors and shareholders will not be expected to personally pay off the company’s debts. If the company is found to break any laws, the directors may be disqualified from directorship, but the company will incur the financial burden of the fine.
What is a Limited Company?
A Limited company is a company structure that is limited by shares. When incorporating a Limited company you will be asked how many shares you wish to issue. These shares will be issued by the person incorporating the company at their chosen nominated value and quantity.
In a Limited company you only need 1 director but you can have as many directors as you wish. The directors are responsible to ensure that the annual reports have been filed and that they show a true and fair representation of the company's financial information.
A Limited company can issue more shares at any time once they have been incorporated, this allows them to raise finance externally very easily which enables them to grow the business with the funds raised. The downside of raising finance this way is that the more shares you raise and sell the less control you will have of the company as the shareholders now will have a say about the company's operations.
The taxing of a Limited company and its directors can lead to the director/owner being double taxed, once on the company's profits through corporation tax and again on the director/owners salary/wages paid from your company in the form of income tax.
A Limited company can retain its profits that it has made after the corporation tax has been paid. The company is not forced obliged to pay the profits out of the company at the end of the accounting period. This means that the company can keep this money and use it for future growth within the company.
What is an LLP?
LLP stands for a Limited Liability Partnership which is a type of company structure which is typically favoured by professions that operate as partnerships, for example solicitors, accountants and dentists are professions that favour a partnership structure.
In an LLP there must be at least 2 designated members who will be responsible for the filing of the annual accounts which is also the case in a limited company where the directors are legally responsible for the filing of the annual accounts. Another similarity that an LLP has with a Limited Company is that they protect its members personal assets by limiting their liability to the sum that they have invested in the business or personal guarantees given when raising loans which is also the case for a Limited Company, the directors personal assets are protected but any money they had invested in the company may be lost.
Although a LLP has similarities to a Limited company there are vital differences in its structure. One major differences is that an LLP does not issue shares. In an LLP there are no shares, no shareholders nor directors. This means that when funding an LLP, the partners must rely on loans or investments from themselves to the partnership to get it up and running. Another difference is that an LLP cannot
The fact that there are no shares also changes the treatment of the profits. In an LLP each member is required to register as self-employed with HMRC, then the LLP must register with Companies House and whilst doing so it should produce a members agreement which should state the share of the profit each member should receive.
Differences Between an LLP & a Limited Company
LLP | Limited Company |
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