LLP formation – what you need to know

A Limited Partnership (LP) is a form of General Partnership, where the partners have the flexibility of organizing the company’s internal structure, but still avail of the benefits of limited liability. In this business structure, one dominant partner runs the business and the multiple ‘limited partners’ make contributions to the partnership in the form of products, services or cash. If an LLP runs into financial bad weather, the general partner has no protection. However, each of the ‘limited’ partners is independent of the liability caused by the actions of other partners. Thus, the LLP structure limits the personal liability of each of the partners for any errors caused by omissions, negligence or incompetence of the employees or other agents involved in the business. For tax purposes, the government recognizes the LLP as an association of co-owners. Each partner or co-owner is taxed to the extent proportional to their share of profits. This is in contrast to the structure of a partnership, where all the partners are liable for any debt incurred by the company. It is to avoid this element of high risk that many people turn to LLP formation.

An LLP must have at least two members, and the rights and duties of all these members are given in the “Deed of Partnership”. Before LLP formation, the company would have to select a “Designated Member” who is responsible for all correspondence with Companies House. This member would also be responsible for supervising and preparing accounts and acting on behalf of the LLP, if it were dissolved in the future.

LLP formation is somewhat similar to other forms of business incorporation. There are two ways in which you can go about the formation of your LLP. You may enlist the services of one of many business start-up agencies who have qualified formation agents. They will guide you through the process of LLP formation, collect all required documentation and advise you regarding tax planning of the company. Currently, Companies House charges £20 for LLP formation. However, if you opt to go for the services of formation agents, they will naturally charge you extra.

It is easier to make use of the services of a formation agent because, LLP formation has a number of rules pertaining to choice of names, the use of sensitive words and expressions, the need for different approvals from recognized authorities and the disclosure of information. At the time of LLP formation, the members of the company should draw up a Deed of Partnership, which is a legally binding agreement that lais out in black-and-white all the responsibilities of each of the partners. This deed would also contain valuable information like the address of the members, their names, amount of capital invested by each of the members and their roles in the company.

One of the constraints of LLP formation is that it is not possible for interested parties to buy an off-the-shelf limited liability partnership, as you can with a limited company. This is because the old the set of documents that need to be submitted to the Companies House has to contain the names of the partners who are present at the time of incorporation. The registration form must contain the following details:

• the name of the LLP
• the location and address of the registered office
• the name and address of individual members of the company at the time of incorporation
• the name of designated members

Limited Liability Partnership Registration

When starting a business you might want to consider a Limited Liability Partnership (LLP) structure for your proposed business. An LLP is one of the newest and most attractive forms of business entities available to entrepreneurs today.

As the name suggests, a Limited Liability Partnership protects the business partners from personal liability for outstanding obligations in business. This is where an LLP is different from general partnerships. In a general partnership, each partner is held personally liable for the company’s debts. So, if the business is sued, each of its partners are equally liable for the debt; which means that even if you invested only 10% in the business, your liability is 100%. That is the reason why many businesses avoid general partnerships, if they can help it.

In a Limited Liability partnership, each partner is limited only to the extent of their investment in the partnership. Thus, their personal assets are far more secure in this kind of a partnership. Since each country has a slightly different law governing LLP’s, the liability of the partners involved changes from place to place. In general, a partner of an LLP is not responsible for any debts, financial obligations, or liabilities another partner may have incurred due to their negligence, misconduct pr wrongful acts.

Many countries extend the liability protection only against negligence claims. What this means is that a partner can be personally liable for other claims, such as contract claims. Another topic discussed by the law is the profits. The profits earned by the limited liability partnership are distributed evenly among the partners. This distribution is for tax purposes as the partnership is not taxed separately. When the partnership is taxed as a whole and not separately, it avoids double taxation which often happens to large corporations.

Registering a limited liability partnership costs less because you do not need a lawyer to register any business as an LLP. This is very useful for small businesses that are short on cash and time. Thus, tax advantage, cost reduction and limited liability are the defining characteristics of an LLP. Additionally, a Limited Liability Partnership has more flexibility when it comes to developing ownership structure. This is because unlike the general partnership where every partner has equal rights, in an LLP, there is one designated member. The other partners are not actively involved in the running of the business. Reporting requirements are also comparatively less when it comes to LLPs.

If you are in a partnership, you can opt to change it to a limited liability partnership by registering with government authorities and fulfilling certain requirements. You will be required to provide proof that the partnership has enough assets to cover any claims and that it has obtained adequate liability insurance. Aside from the proof of assets, businesses must also pay a registration fee in order to become a Registered Limited Liability Partnership or LLP. Professional partnerships like lawyers, dentists, engineers, accountants and the like must register as Professional Limited Liability Partnerships. In any case, these professionals prefer limited liability partnerships because they limit the liabilities of partners who are innocent of negligence and any other form of malpractice.