A significant number of small businesses in the UK do not take full advantage of HMRC-approved...
For the majority of organisations, choosing a business vehicle comes down to either Partnership or LLP (limited liability).
But as an organisational head or owner, how do you know which business vehicle is right for you?
How to choose between Partnership and LLP
The right business vehicle for you can be narrowed down to both individual circumstances as well as a range of varying factors, like legal requirements and tax considerations, among other things.
Let’s look at some of the key differences to help you decide.
Partnership – Why this could be your ideal business vehicle
The main underlying difference between a limited company and partnership is that the former is a completely separate legal entity. However, within partnerships, there are traditional partnerships and limited liability partnerships (LLP).
We need to consider both in order to see for ourselves whether it makes more sense to choose partnerships or either one of the LLPs as a business vehicle.
In a traditional partnership, you and your partner or partners own the business and must absorb all liabilities. This can be beneficial for a number of reasons:
- No filing requirement as such – which means no need to register your organisation at Companies House or pay the associated fee;
- Simply draw up a partnership agreement which defines the business structure, along with the unique roles and responsibilities of each partner;
- There may be tax benefits because no National Insurance Contributions need to be paid and income is drawn in the form of earnings, not a PAYE salary.
Limited liability partnership (LLP)
This ‘hybrid’ vehicle was intended to combine some of the key benefits of a partnership with a limited company business structure. It’s become rather popular today for several reasons including:
- Should a business go bankrupt, any unpaid debts are not the partners’ responsibility. The limited liability structure ensures that creditors do not have the authority to ask for compensation against what the failed business owns, such as personal income or assets;
- Through LLP, you can tap into some of the key benefits of a partnership-style structure – leverage a variety of skills and experience from different people, pool resources, spread out the risk more evenly, distribute work fairly, etc;
- Partners can get involved in management activities;
- LLP is deemed a trustworthy and credible option where a corporate structure is in place, making it perfect for most professional services companies.
Limited Company – Why this could be your ideal business vehicle
The limited company business vehicle was specifically designed to facilitate running a business. It provides clarity and protection which other legal entities do not afford. Benefits include:
- Personal liability remains as low as possible and shareholders are only held liable for unpaid amounts owed on their shares;
- Highly credible structure – perfect if you want to create a professional impression and establish trust with your clients;
- Investments are far easier to manage;
- More tax efficient – shareholders only get taxed on their withdrawings and not their profit share;
- Good way to protect your business name since others can’t use it.
What it comes down to
While the above are just some of the benefits at a glance of choosing either business vehicle, there are actually quite a few factors that must be carefully considered.