Limited liability partnerships for tradespeople

When successfully run, limited liability partnerships allow you to work together to relieve pressure, achieve long-term goals and get your new business off to a flying start. However, there are some pros and cons to a limited liability partnership and it’s important to be aware of them before you move forward.

As with any important decision, you should consider all your options first and research before arriving at a decision. That’s why we’ve put together this guide for everything you need to know about LLPs before taking the plunge.

In a hurry? Scroll down the FAQs section if you want some quick answers.

LLP vs Ltd

A limited company will be limited by shares or guarantees and will pay corporation tax on all profits. It’ll also have a registered UK address and a bank account, be able to sell shares for profit and pay investors a dividend. You set it up as an individual, naming yourself as a director and major shareholder.

On the other hand, a limited liability partnership has to be set up with at least two people. The limit of a partner’s liability in an LLP will be agreed upon between them, and an LLP cannot sell shares or receive capital from them. The structure of a partnership is flexible and can be changed at any time.

What is an LLP

A limited liability partnership is a business that has at least two designated members. It’s a useful way for two tradespeople to join forces. In most cases, an LLP is between two people, but it can also be a company and an individual joining together.

As a partnership, each member is responsible for paying taxes on their share of the profits, as well as any other personal taxes they need to pay. The individual members are not personally responsible for any debts – hence the name, limited liability.

How to set up an LLP

Setting up an LLP is a fairly straightforward process. You’ll need to:

• Choose a name – This name can be anything you like, but it must end in LLP. Make sure it’s unique and check it hasn’t been used before by using the Companies House name search tool
• Have a single registered address – This can be a home address or shared premises. Keep in mind that the address will be publicly available
• Have at least two designated members – LLP members can be two individuals who agree to work together, or it could be an individual and a company
• Create an LLP agreement – This will set out how the partnership is structured and how it will be run
• Register the LLP with Companies House – This formalises the agreement and will make the partnership legally binding

Once you’ve completed all these steps, your partnership has been established according to the law. You can find a full list of rules and regulations about setting up an LLP on the government’s website. Or, to set up a limited company, check out our blog here for helpful tips and advice.

Limited Liability Partnership UK advantages and disadvantages

By setting up an LLP, you will become entitled to all the benefits of a partnership – an LLP is a formal and legally binding agreement that provides a solid base for growing a business. Pooling together resources between partners means that you can reduce overheads and ongoing costs. By sharing between two, you’ll find that insurance, accountancy and office costs are all lower.

Resolving issues
As well as expenses, you share the management of the partnership and its future direction. You’ll get to bounce ideas off one another and consult when it comes to making important decisions for the business. Working with a partner will also add security for those who work with you and give you the freedom to decide how you shape your business together. You’ll be able to look out for and take on larger pieces of work – ultimately helping your business to grow.

If you run into trouble in an LLP partnership, your roles and responsibilities are clear, which makes dispute resolution a simpler process. If the partnership fails, or you run into financial trouble, your assets will remain protected. It’s also worth noting that working together may mean you are able to branch into new lines of work or projects as you combine your skills.

Sharing responsibilities

That said, keep in mind there are also downsides to a partnership. You’re together through the good and bad, which means when business is good, you’re able to share the workload. But when business isn’t doing so well, you’ll still have to share profits, which can mean less pay through lean periods.

An LLP involves more paperwork and higher running costs when compared to a sole trader setup. Should the partnership fail for any reason, there are legal hoops you’ll have to jump through to terminate the contract. Although possible, it can be a time-consuming and costly process. For more detailed information about the differences between a limited company and a sole trader, check out our blog here.

Working with a partner will require clear communication from the get-go, with a similar shared vision of the future for the business and its growth. You’ll need to ensure that you both have the same plans for your shared business or things can become tricky early on.

As with any relationship, partnerships can be complicated. But when they work, they can transform the way you operate for the better.

What is a limited liability partnership in simple words?

A limited liability partnership is a legal relationship between two people (or parties). Whereas a general or informal partnership is an agreement between two people to work together which doesn’t involve any paperwork or legal documentation.

How does an LLP work?

Simply put, an LLP is a legal partnership that exists between two people or parties where profits will be split equally. You will both be protected should the business not work out financially, which will provide a sense of security as it grants you the freedom to make some high-risk decisions that could quickly scale up the business.

How are LLPs taxed in the UK?

The main disadvantage of an LLP in the UK is that it can be less tax efficient if you’re wanting to employ lots of people. The income is still personal income and will be taxed as such. This means that tax can be higher than what you’d pay as an Ltd company and profits cannot be gained in the same way. As a partnership, each member is responsible for paying taxes on their share of profits and any other personal taxes they are required to pay.

FAQs

What are the disadvantages of LLP?

As with any partnership, there is always the chance the relationship could break down and things could become very difficult to sort. It’s always best to know who you’re getting into business with and establish your shared vision for the company from the start. This will help to avoid the expensive process of having to go through legal procedures to terminate the partnership.

What are the benefits of an LLP company?

When putting two heads together, it is often more effective than carrying the burden of a business and all the responsibilities that come with it on your own. When sharing a business with another person, you are able to brainstorm together and expand your business as you bring your resources, knowledge and strengths together.