LLP or LTD?

	Which is best for your purpose? Requirements LLP LTD Use partner's tax allowances X Employ non-professional staff X Run a large PAYE scheme X Be taxed as self-employed X Limit the liability of professional partners X Hold shares in another business Maintain a steady business for a small or fixed number of partners X Expand the business and employ many people X Manufacturing/distribution business X Profession * Sell shares in the business X * Many professions allow and use the LTD format. Either is possible, but the LLP format was originally intended to meet the needs of the professions.

The 'Limited Liability Partnership" (LLP) format of registered company was originally created to enable the professions to take advantage of limited liability, but its popularity is growing among a much wider range of business. The LLP is subject to many of the same rules as a traditional "private company limited by shares", for instance the LLP must report changes to its registered details (including members names and addresses), it must complete an Annual Return and it must file Accounts each year.

A limited liability partnership does not have Directors or a Company Secretary, but it must have at least two designated members who stand as the company's primary representatives in much the same way as Directors.

LLPs must be formed for active trading - they cannot be registered as dormant. A statement on the Companies House forms for LLP registration confirms that the registrants are joining in business for the purpose of making a profit. That excludes non-profit enterprises (such as clubs or charities) and it also excludes non-trading companies ("dormant companies").

There is no absolute rule that makes one format better than the other. In any case, if your business changes over the years so that the alternative format becomes more appropriate, it is possible to form a new company of the other type - then transfer the business over to the new company. Having been around much longer, the status of private limited companies (LTD) is defined by far more case law; but time will gradually even out that difference.

The key difference that affects the view of many start-up businesses is the tax treatment of the owners (members). In a traditional LTD the Directors (who are also usually the sole shareholders in a start-up company) are treated as employees of their own company. This means that their salary is subject to personal Income Tax and National Insurance and employers' NI contributions. Profits left in the company (not withdrawn as salary) are subject to the much lower Corporation Tax.

The members of an LLP pay Income Tax as self-employed persons, so there is no employers' NI to pay. On the other hand, all the profits of the company are regarded as the members' income and are subject to Income Tax.
So the balance of tax advantage depends on how much profit the company might make and how much the owners pay themselves.

One other important factor should be weighed in the balance: how likely is it that the business will be sold as a going concern? A "private company limited by shares" (LTD) is more anonymous and easier to separate from the owners by means of transferring the shares. A partnership is much more personal and therefore less easy to separate from the owners.