Contractors may find limited liability partnerships useful

Contractors will find that there is no particular advantage in choosing a Limited Liability Partnership instead of a limited company as the main vehicle for their businesses. LLPs were actually created by accountants originally, who wanted to group their companies into large associations of partners (the big accounting firms still use this form of business so that they can share profits, but keep expenses and problems separate).

"The principal advantage in tax treatment," says Simon Sweetman, a tax consultant based in Felixstowe, ''is that the partners can split all income between them as dividends. They can of course also do this in a limited company, and there the recordkeeping obligations are less complex.''

What is an LLP?

A Limited Liability Partnership (LLP) consists of two or more persons who agree to share a business. They are obliged to register their partnership with Company House. The partnership then becomes a company which can do almost everything a limited company can do: own property, sign contracts, incur debts, etc. Liability is limited to the money that the partners invested in the business and any personal guarantees they have given to raise finance.

The difference between a LLP and a limited company is that the LLP cannot issue shares, or hold share capital, nor does it have company directors. The rules that govern how shareholders interact with company assets don't apply to LLPs. The result is that an LLP has complete flexibility as regards the internal structure which it wishes to adopt: there are no requirements for board or general meetings or decision-making by resolution. And an LLP does not require a memorandum or articles of association. A limited company is restricted in the ways it handles all of these requirements. An LLP must be run according to a written agreement accepted by all partners.

Internal Flexibility

This internal flexibility can be an advantage for LLPs: it facilitates participation in management and the feeling of running a partnership. The partners can make decisions easily without consulting anyone else, and without worrying about the effect a decision will have on shareholders.

Heavy RecordKeeping

There are a number of disadvantages that LLPs suffer.

Because those in the LLP enjoy limited liability, the protection of those dealing with an LLP requires that the LLP maintain accounting records, and that it prepare and deliver audited annual accounts to Company House. The exemptions available to companies, for example with respect to the delivery of abbreviated accounts and exemption from audit also apply to LLPs.

What is different here for LLPs is that they cannot keep anything secret; all financial information must be disclosed, whereas a limited company runs its finances according to its own lights. "Obviously this is not a problem for a major accounting firm, but could be one for a small business,'' says Sweetman.

Then there is a certain amount of legal uncertainty related to running a LLP. The LLP is a relatively new structure in British law, and both the Revenue and judges in court proceedings may not react predictably to it.

So What Do You Gain?

''If you are considering a LLP, take advice first,'' Sweetman suggests.

You should realise that your liability is limited just as effectively in a limited company as in an LLP.

While partnerships may feel good to some people, running a limited company, particularly a small one isn't all that different from running a partnership. Usually contractors have small groups of shareholders, often from their families, and consulting them isn't all that complicated if you need to.

So contractors should consider carefully why they would prefer an LLP to a limited company. If you think there is a specific advantage you may want, ask a professional about it.