Choosing the correct business vehicle can make a lot of difference in a variety of ways. The choice of vehicle is usually between a limited company and an LLP. There are other entities as well, such as a sole trader, a general partnership, and certain charity and not-for-profit organisations. Each has its place, but for most owner-managers, the choice is limited company or LLP.
An LLP is a relatively new concept, which came into being in 2000. It is a legal person, unlike a partnership, which is allowed to contract in its own name, own property, and act in a manner almost identical to a company. The members of an LLP have limited liability up to the value of the capital invested, rather as shareholders do in a company. However, unlike shareholders, the members of the LLP operate it. There are no directors although there are designated members who are responsible for legal matters.
For tax purposes the members of an LLP are taxed directly as if they had earned their share of the LLP’s profits themselves. Their tax is not related to the money they draw from the LLP but only to the allocated share of profits of the LLP. The amount of their share of the profit is determined by agreement between the members from time to time. It is therefore very flexible in this way. The LLP itself pays no tax on its profits.
A limited company, on the other hand, has shareholders with a fixed number of shares and fixed rights according to the articles of association of the company. It also has directors who are employees of the company. The directors receive a salary for their services like every employee, and the shareholders receive dividends in proportion to the shareholding.
The choice between these two entities is largely a matter of flexibility. An LLP allows its members to join and depart with no tax consequence. An LLP also allows the amount of income allocated to each member to be flexible each year. However, an LLP results in each member paying tax on their share of the income at the marginal rate applicable. A company however, can accumulate profits at a rather lower rate, and higher rate taxes are only payable on profits withdrawn. Companies are also easier to sell and easier to raise equity funding for.
Other types of entities mentioned above can be useful if you do not wish to file accounts on the public record, but that sort of company will generally carry with it unlimited liability for its owners.
This page represents only a very short summary, and obviously the matters for consideration are more complex. Call us on +44(0)330 024 3200, and we can help you find the best solution for you.