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Partnership v LLP – Which is best?

28 May 2012

On a regular basis, I receive queries from business clients trying to find the most suitable business vehicle to suit their commercial (and personal) needs. As is so often the way in life, there is never a perfect match and therefore careful thought should be given to choosing the most appropriate business vehicle for you.

In particular, clients often ask about the differences between a general partnership (referred to here as a partnership) and limited liability partnership (referred to as LLP) and the advantages or disadvantages of both as a vehicle for running a business. There are a number of important differences to consider.

On a fundamental level, a partnership is not a separate legal entity distinct from its partners. In other words, a partnership is a collection of individuals working together in business with a view to profit. A LLP, on the other hand, is a separate legal entity distinct from its members and in practice a LLP is a type of hybrid entity, adopting many characteristics of the company and the partnership.

This has a number of significant implications in differentiating between the two. A LLP must first be incorporated at Companies House whereas partnerships are not subject to this requirement. The level of regulation enjoyed by a partnership is minimal in comparison to a LLP as a LLP is subject to many of the same statutory requirements that apply to companies, including the requirement to prepare and file accounts. Partnerships are not subject to such obligations.

Very importantly for many is the fact that members of a LLP enjoy limited liability up to the amount of any financial contribution to the LLP, mirroring the situation of the shareholder in a company. In a partnership, the situation is quite different as partners are jointly (and severally) liable for the debts and obligations of the partnership incurred while he or she is partner and, scarily, such liability is potentially unlimited. This difference has made the LLP seem the more attractive option for many!

There are also similarities between the two, including the tax treatment of partners of a partnership and members of a LLP. For tax purposes, the LLP is treated as a partnership and therefore members of the LLP are treated as self-employed (Schedule D) for tax purposes.

Of course, there are other business vehicles to consider including sole trader and a limited company. Whichever vehicle is best for you will depend on how much flexibility you need to run the business, the way the business is financed and the expected duration of the business (amongst other considerations). Giving such issues careful consideration will help you make your choice.

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