Adapted from CLG Structures for Service Delivery Partnerships Technical Notes,  2006

Limited Company

Limited Liability Partnership ("LLP")

Limited Partnership ("LP")

Running the business:

A corporate body

A corporate body. Must be formed with a view to a profit but this can alter following set-up of the LLP.

A group of individuals with a common goal and a view to a profit.

Administration:

All limited companies must reflect their limited status in their registered names (although they need not trade in that name), invoices, business letters and websites.

A company can ave a single hareholder. It may also have only one director. The role of Company Secretary is now optional. The company must have an objects clause and must have a registered office. Under the Companies Act 2006, from 1 October 2009 a newly incorporated company will not have a Memorandum of Association; its objects (scope of business) will be unlimited by virtue of the 2006 Act. The Memorandum of an existing company will be treated as part of its Articles of Association and an existing company will be able to render its objects unlimited by changing its Articles. The Articles will continue to play an important role in the way in which companies are run.

The maximum number of shareholders will be determined by the number of available shares/securities.

All LLPs must have a business name that ends with 'Limited liability Partnership' or 'LLP' to indicate the entity's status. The name must be registered and the status must be shown on all business documents (including all etters) and on its website.

At least two persons/bodies are required to form a LLP. A LLP has unlimited capacity regarding objects. There must be a lawful business, a view to profit and a registered office. Although not compulsory, there should be a written partnership agreement. The Limited Liability Partnerships Act 2000 sets out default terms that apply in the absence of exemptions.

There is no maximum number of embers within a LLP.

In a 'traditional' limited partnership there must be at least one 'general' partner who anages the day to day business and enters into contracts on behalf of all artners. The General partner is liable for all debts/obligations of the limited partnership

A LP will also have limited partners whose liabilities are restricted to their investment in the LP. Limited partners may not take part in the LP's management and do not have power to legally bind the partnership. 

At least two persons/bodies are required to form a LP. A LP has unlimited capacity regarding objects. There must be a lawful business, a view to profit and a registered office.

Although not compulsory, there should be a written Partnership agreement. The Limited Partnerships Act 1907 and the Partnership Act 1890 set out default terms that apply in the absence of exemptions.

Subject to exceptions, a maximum of 20 partners in a LP.

Key roles:

Directors (of which there may be only one) need not be shareholders. Directors have specific fiduciary duties and responsibilities with regard to the company.

Company Secretary required. The Board of Directors can bind the company.

No directors but concept of 'designated members' to undertake duties commensurate to that of a director of a company. There must be at least two designated members. If silent, all members are deemed designated members.

Any member can bind the LLP, unless he had no authority and the third party knows this.

The general partner will undertake day to day management. 

A limited partner is not able to bind the partnership. However, any limited partner becoming involved in the management of the partnership will lose limited liability status as if he were a general partner.

Decision-making:

Process heavily regulated. Generally, 50% or 75% majority shareholders can take major decisions.

There is flexibility to determine in the agreement the rights to be afforded to different members and the extent to which partnership law is to be applied. If no agreement is in place, default provisions may be applied that require unanimous agreement from members.

There is flexibility to determine in the agreement the rights to be afforded to different partners and the extent to which partnership law is to be applied. If no agreement is in place, default provisions may be applied that require unanimous agreement from partners.

Employee issues:

Greater flexibility in staff reward options, such as share schemes and approved company pension schemes.

No shares and therefore no option for share reward schemes.

No shares and therefore no option for share reward schemes.

Liability:

The company itself is liable to the full extent of its assets. This offers members long-term protection from Creditors (including banks). Shareholders' liability normally restricted to the amount, if any, paid on their shares.

The LLP itself is liable to the full extent of its assets, whilst the liability of the members is restricted to their respective capital contribution plus the amounts of any personal guarantee.

The general partner is jointly and severally liable to for all of the partnership debts, in proportion of their partnership share. The liability of limited partners is restricted to their capital.

BUT…

Protection may be limited if personal negligence is concerned, if personal guarantees are given, or, for directors who allow the company to trade in an insolvency scenario (fraudulent or wrongful trading). Many lenders may require personal guarantees from company directors in respect of the company's obligation.

Protection may be limited if personal negligence is concerned, if personal guarantees are given, or if the members permit the LLP to trade in an insolvency scenario (fraudulent or wrongful trading). Provisions for funds to be clawed back apply under the Insolvency Act, where a member takes out drawings leading to the LLP becoming insolvent. 

If limited partners participate in management of the business, they are liable for all debts arising in that period as if they were a general partner.

Membership:

Shareholders own shares or securities in the company. Different classes of share give shareholders varying rights.

Members are entitled to profits and/or capital in accordance with a formal agreement.

Partners are entitled to profits and/or capital in accordance with the partnership agreement.

Reporting requirements:

Companies must satisfy: 

●  Companies Act Requirements including Articles and Memorandum of Association. Forms 10 and 12 - statutory declaration. 

●  Directors' Report and business review detailing how directors have complied with their obligations to promote the company's success. 

●  Presentation to Annual General Meeting. 

●  Potential audit requirements, subject to exemptions. 

●  Public disclosure issue. 

●  Full impact of employment legislation on all people working in the business. 

●  CTSA tax return to the Inland Revenue.

LLPs have similar reporting obligations to companies: 

●  Incorporation document in form approved by Registrar of Companies. A statement of compliance. 

●  No Directors' Report. 

●  No Annual General Meeting requirement but details provided to members. 

●  Subject to same audit exemptions as a company. 

●  Information distributed only to members of the LLP. 

●  Partnership Tax Return to Inland Revenue.

There are no formal reporting requirements. Accounts are only available to full existing partners. 

Full accounts and disclosure required to Inland Revenue on Partnership Tax Return.

Status:

Greater commercial status and substance.

Good commercial status and substance. 

Recognised vehicle to receive funding.

Potentially less commercial status and substance.

Retention:

BUT…

Profit retention at a low corporate rate can be beneficial where owners only wish to withdraw part of the profits.

Flexibility on retention and payout of profits, including option to reward individual shareholder directors via dividend and/or salary.

In practice, companies are used where there is an intention to retain profits in the long term in order to obtain lower tax rates. 

Additional tax cost of extracting profits from the company: 

●  There may be an additional tax charge in a corporate structure on asset disposals; where the company makes a gain (and pays corporation tax) and the value of the shares increase, a charge may also arise on the increase in share value on a disposal by the shareholders. 

●  Company profits will be subject to corporation tax and, when distributed, will be subject to income tax in the hands of an individual shareholder. 

●  Generally receipt of a dividend by a UK resident corporate or public sector shareholder will not be a taxable receipt 

●  Tax exempt public sector shareholders will get no credit or refund for tax paid by the company on gains.

Each member pays income tax (or corporation tax for a corporate member) at their marginal rate even if profits are not withdrawn from the business.

Flexibility on retention and payout of profits, including ability to vary profit entitlement.

In practice, many LLPs likely to pay out profits as they arise, subject to working capital requirements. 

Profits are attributed directly to the partners as they arise and there is no further tax payable by the partners as and when the profits are distributed.

There are therefore no double tax charges for corporate members of an LLP; income and gains are taxed in the member company only as the LLP is transparent. 

Each partner pays income tax (or corporation tax for a corporate partner) at their marginal rate even if profits are not withdrawn from the business.

Flexibility on retention and payout of profits, including ability to vary profit entitlement.

In practice, many partnerships likely to pay out profits as they arise, subject to working capital requirements. 

Profits are attributed directly to the partners as they arise and there is no further tax payable by the partners as and when the profits are distributed.

There are therefore no double tax charges for corporate partners in an LP; income and gains are taxed in the partner corporate entity only as the LP is transparent. 

Losses: relief by shareholders/ members/partners

Shareholders may, depending on their tax profile, wish to ensure that they have access to losses incurred by the company. Care will have to be taken to ensure that the group relief or consortium relief rules can be utilised. 

If the group relief or consortium relief rules cannot be utilised a shareholder cannot get income tax relief for any corporate losses except in limited circumstances on a disposal of the shares. There is no special relief for losses in early years of trading.

An individual member may be able to use trading losses against other personal income and/or capital gains. In addition, they have specific relief available for losses in early years of a business.

Usual corporate loss reliefs including group or consortium relief may apply to a corporate member's share of loss. In all cases, loss relief is limited to the amount of member's contribution less amounts withdrawn (plus, potentially, retained profits). If losses cannot be fully utilised, they can be carried forward and potentially used later.

An individual partner may be able to use trading losses against other personal income and/or capital gains. In addition, they have specific relief available for losses in early years of a business. 

Usual corporate loss reliefs including group or consortium relief may apply to a corporate partner's share of loss. In all cases, loss relief is limited to the amount of partner's contribution less amounts withdrawn (plus, potentially, retained profits). If losses cannot be fully utilised, they can be carried forward and potentially used later.

Interest on borrowings by shareholder/ Partner:

Potential income tax relief for acquiring shares and making loans subject to conditions. 

More straightforward relief for capital contributions.

More straightforward relief for capital contributions.

VAT:

Company is separate entity for VAT purposes and liable for VAT registration, subject to normal rules. 

Company may be able to join a VAT group, subject to normal conditions.

LLP is separate entity for VAT purposes and liable for VAT registration, subject to normal rules. 

LLP may be able to join a VAT group with other companies, subject to normal conditions relating to control. 

Partnership is separate entity for VAT purposes and liable for VAT registration, subject to normal rules.

Anti-avoidance:

Specific rules apply to investment and property LLPs, especially where member is a tax exempt body.

Profit extraction:

Generally permitted for "distributable profits" only (i.e. taking into account realised profits and losses).  

Potentially more flexible: equity participation offered but without the restrictions of shares: flexible reward strategies.

Potentially more flexible: equity participation offered but without the restrictions of shares: flexible reward strategies

Dividends:

Family members can also extract funds as shareholders via dividend payments subject to anti avoidance provisions.

n/a

n/a

Pensions:

Directors/employees pay pension contributions by reference to amounts extracted as salary and not dividends. 

A company can set up a company pension scheme.

Partners pay pension Contributions by reference to earnings. 

A LLP cannot set up a corporate pension scheme for members.

Partners pay pension contributions by reference to earnings.