One of the questions we are most frequently asked by both current and especially by new clients relates to the most appropriate structure for their business. It’s rarely a topic that has a clear answer as there are advantages and disadvantages to a corporate structure and indeed, other alternatives. In this article we have discussed the most recognised ways to run a business and some of the advantages and disadvantages of the different structures. This week we explore Limited liability partnerships and Limited Companies.
Limited liability partnership (LLP):
For tax purposes, an LLP is treated the same as a partnership and the advantages and disadvantages listed for a partnership apply to an LLP with one notable exception: the partners, or members, of an LLP have limited liability status. Accordingly, the partners’ personal assets are protected from third party claims. LLPs are also required to prepare accounts in a particular format and file a copy with Companies House as well as HMRC. Consequently, the costs of fulfilling these obligations are higher than those for a sole trader or non-LLP partnership.
Company limited by guarantee:
In essence, a company limited by guarantee is a limited company with no shareholders. Instead, the persons who set up the company – its members – guarantee to pay a fixed amount into the company if required on the winding up of the company. Usually these guarantees are for small amounts. This type of company is typically used by not for profit organisations and charities rather than trading companies.
Limited liability company (LTD):
An LTD is a separate legal entity owned by its shareholders and managed by its directors. In many smaller LTDs, shareholders and directors are the same person. Directors are employed by their LTD, they are not self-employed. LTDs are required to pay corporation tax on their profits, not income tax.
Provides a legal structure that will facilitate individuals running a business together.
An LTD structure provides the shareholders, the owners, with limited liability – their personal assets will be protected.
If a business is profitable, it is likely that an LTD structure will reduce taxation. Director shareholders can apply a mix of salary and dividend payments, thus saving National Insurance, and any retained profits will be taxed at the lower corporation tax rate. Compare this to an unincorporated structure, sole trader or partnership, where all the business profits are taxed at income tax rates whether the profits are taken out or retained in the business.
More complex tax filing is required, the company will have to submit accounts and a corporation tax return, and the directors will be required to file a tax return.
As well as filing accounts with Companies House, LTDs also have to keep their records of shareholders and directors updated, facilitated by the filing of an annual confirmation statement.
Director/shareholders of an LTD will still run the risk of complications if relationships break down. The formal dissolution or liquidation of an LTD can be an expensive affair.
Contact us at MJB Avanti (08000) 388 799 for help with all aspects of accountancy support for Ltd and LLP businesses. If you’re not yet incorporated, we can assist you with you this also.