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What is LLP (Limited Liability Partnership)?

An LLP is a partnership where the partners have limited liability. Common for professional services firms like accountants and lawyers.

Example

Two lawyers form 'Smith & Jones LLP'. Each partner pays tax on their share of profits, but personal assets are protected.

Key Dates

Must register with Companies House

How LLP (Limited Liability Partnership) Works in Practice

A Limited Liability Partnership (LLP) is a hybrid business structure that combines elements of a partnership and a limited company. Like a partnership, profits are shared between the members (partners) and each member pays Income Tax and National Insurance on their share through Self Assessment. Like a limited company, the LLP is a separate legal entity, providing limited liability protection to its members.

An LLP must have at least two designated members, though it can have more. Designated members have additional responsibilities similar to company directors, including signing the annual accounts, filing the confirmation statement with Companies House, and appointing auditors if required. All members can participate in management unless the LLP agreement specifies otherwise.

LLPs are most commonly used by professional services firms -- accountants, lawyers, architects, consultants, and financial advisers. They are attractive because they combine the tax transparency of a partnership (profits taxed once at the individual level, not at the entity level) with the limited liability protection of a company. However, HMRC's 'salaried member' rules (introduced in 2014) can reclassify some LLP members as employees for tax purposes if they meet certain conditions.

To form an LLP, you register with Companies House (£12 online) and file an incorporation document signed by all designated members. There is no requirement for articles of association, but a well-drafted LLP agreement is essential to govern profit sharing, capital contributions, decision-making, and exit provisions. Without a written agreement, the default provisions of the Limited Liability Partnerships Act 2000 apply, which may not suit your needs.

Step by Step

An LLP operates as a separate legal entity -- it can own property, enter contracts, employ staff, and sue or be sued in its own name. The members are not employees of the LLP (unless caught by salaried member rules); they are self-employed individuals who share in the profits.

Each member's profit share is determined by the LLP agreement. At the end of the LLP's accounting period, the total profit is allocated to members according to the agreed ratios. Each member then reports their share on their personal Self Assessment return and pays Income Tax at their marginal rate plus Class 2 and Class 4 National Insurance. The LLP itself does not pay Corporation Tax or any entity-level tax.

The LLP must file annual accounts with Companies House and a partnership tax return (SA800) with HMRC. The partnership return shows the total profits and how they are allocated between members. Small LLPs may qualify for audit exemption under the same thresholds as small companies. The LLP must also file a confirmation statement with Companies House annually.

Practical Tips

  • Invest in a comprehensive LLP agreement drafted by a solicitor -- it should cover profit allocation, capital contributions, decision-making, new members, departing members, and dispute resolution
  • Review the salaried member conditions annually for each member -- a member whose circumstances change could be reclassified, triggering unexpected PAYE obligations
  • Compare the total tax cost of an LLP versus a limited company structure before choosing -- the right answer depends on your specific profit levels and the number of members
  • Ensure at least two designated members are appointed at all times and understand their additional responsibilities for filings and compliance

Common Mistakes to Avoid

  • Not having a written LLP agreement -- the default statutory provisions rarely match what the members actually want regarding profit sharing and exit terms
  • Ignoring the salaried member rules -- if a member receives a fixed salary, does not contribute significant capital, and has no significant influence, HMRC may treat them as an employee for tax purposes
  • Assuming an LLP has the same tax efficiency as a limited company -- LLP members pay NI on their profit share, which can make LLPs more expensive for high earners
  • Not designating at least two members as 'designated members' -- this is a legal requirement and carries penalties if not complied with

Frequently Asked Questions

How is an LLP taxed differently from a limited company?

An LLP is tax-transparent, meaning profits pass through to members who pay Income Tax and NI personally. A limited company pays Corporation Tax on profits, and shareholders then pay dividend tax on distributions. For higher earners, the effective rates can differ significantly.

What are the salaried member rules?

If an LLP member meets three conditions -- they receive a fixed amount regardless of profits, they do not have significant influence over the LLP, and their capital contribution is less than 25% of their expected profit share -- HMRC treats them as an employee. The LLP must then operate PAYE on their earnings.

Can an LLP have corporate members?

Yes, a limited company can be a member of an LLP. The company's share of LLP profits is then subject to Corporation Tax rather than Income Tax. This structure is sometimes used for tax planning but is subject to anti-avoidance rules.

What filing obligations does an LLP have?

An LLP must file annual accounts with Companies House, a confirmation statement annually, and a partnership tax return (SA800) with HMRC. Each member must also file a personal Self Assessment return reporting their profit share.

Source: HMRC Partnership Manual (PM200000+): https://www.gov.uk/hmrc-internal-manuals/partnership-manual and LLP Salaried Member rules: https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm131000

Related Terms

Limited Company

A limited company is a business structure that's legally separate from its owners. Your personal assets are protected if the business fails.

Self Assessment

Self Assessment is the system HMRC uses to collect Income Tax from people who don't have all their tax deducted at source (via PAYE).

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