This page is here to lay out the facts about Limited Liability Companies, explaining what they are and presenting the questions you need to ask to decide if it is the best structure for your business. Nothing on this page or website is intended to be legal advice, and we recommend that you seek appropriate professional advice if you are in any doubt about the best structure for your business.
What is a limited liability company?
A limited liability company combines the characteristics of old partnerships and limited liability companies. Like limited liability companies, they offer limited liability protection to shareholders. Like traditional associations, they offer flexible tax structure and governance arrangements.
Limited Liability Partnerships (LLPs) are very recent and were introduced on April 6, 2001. LLPs were designed for traditional professional partnerships, such as lawyers, accountants or architects, whose professional bodies had not allowed them to previously incorporated as limited liability companies.
Benefits of Limited Liability Companies
o Unlike a conventional partnership, partners (also known as members) can limit their personal liability for things like employee liability.
o Limited liability companies allow more flexibility with voting rights and rights to the assets of the partnership when the partnership ends. This can be especially helpful when allowing new or retiring members.
o The tax treatment may be advantageous to companies
How to form a limited liability company
An LLP must have the proper forms filed with the Companies Registry to be formed, in the same way as a limited company. The Registrar of Companies issues a Certificate of Incorporation upon receipt of these forms.
As a caveat, Companies House will check the proposed name prior to incorporation to ensure that the name is not being used by a company or another LLP. We strongly recommend that you return your completed documentation as soon as possible because Companies House works on a first-come, first-served basis. A delay can mean that you will lose your name to a rival.
The deed of company
We strongly recommend that you have an agreement setting out the duties, rights and responsibilities of each of the partners and setting out how the business will be run on a day-to-day basis. The legislation has few provisions governing these relationships.
We provide a model partnership deed that:
o It acts as a formal agreement that establishes the rights and obligations of the partners during the existence of the company.
o Establishes the conditions when the company is dissolved
o Gives details of profit sharing (with a presumption of equitable profit sharing)
o Allows monthly salary payments to prepay profit sharing.
o Allows you to establish decision-making procedures
o Puts vacation arrangements in place
o Establishes rules for partners with outside interests.
How is a Limited Liability Company taxed?
Limited Liability Companies are taxed, for the most part, in the same way as traditional companies. The tax collector “reviews” a partnership’s profits and treats them as the personal income of the partners, with each partner assessed based on his or her share of the LLP’s income or profits. There are some differences from the traditional partnership: Loss relief is not unlimited for the limited liability partner.
When a traditional partnership converts to limited liability status, a stamp duty exemption is generally granted on the transfer of ownership of the partnership provided that all partners in the existing partnership transfer to the LLP with identical interests.
How is a limited liability company managed?
You must ensure that any agreement addresses how the LLP is run and what the duties and responsibilities of each of the members are.
LLP partners are free to decide their internal relationships, in the same way as a conventional partnership. Because the Limited Liability Company is a separate legal entity, it can own property and enter into contracts. Like a business, an LLP continues as before even when its members change.