Setting Up a Business Partnership or LLP

LLPs give you more protections than general partnerships — here’s how to set up both.

Updated: May 20, 2024
Matt Crabtree

Written By

Matt Crabtree

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When two or more people team up together in a binding way, sharing in the profits and losses of that enterprise, they are said to be in a ‘partnership’.

While the stakes are higher for general partnerships, LLPs give more liability protections. But the two are quite similar.

If you're thinking of forming a business partnership, it's helpful to have a basic awareness of the process. In this post, we'll define business partnerships, examine how to form them, and address some common concerns.

In a Nutshell

General partnership steps

  • Choose your business name.
  • Have a publically-accessible registered address.
  • Maintain a minimum of two ‘designated members'.
  • Be governed by a legally binding general partner agreements.
  • Submit required information to Companies House.

There may be fewer reporting requirements compared to LLPs

Limited Liability Partnership (LLP) steps

As will be shown below, limited liability partnerships have additional legal requirements for formation and management in order to ensure the protection of its “members” (i.e., the partners). 

One of the main advantages of LLPs over limited corporations is that the LLP agreement need not be made public after registration with Companies House. 

All in all, general partnerships are quite informal and simple to create, but you take on more risks on the back-end as a general partner. 

What is a business partnership?

A partnership is a kind of legal business structure in which the gains and losses of a company are shared between two or more people. 

So, if you want to do business with two or more people — you could go for a general partnership or a limited liability partnership. Keep in mind that the setting-up process for LLPs is longer, due to it offering more liability protections. With quite 

It's important to first examine the similarities between general partnerships and LLPs before moving on to the differences between the two.

The Agreement Structure

Both general partnerships and LLPs are governed by partnership agreements. Without an explicit agreement to the contrary, the law will “impliedly” include some provisions into your partnership. 

There should be a written agreement between all partners in any partnership. This will reduce the potential for future disagreements. 

The partners in a partnership are bound by the terms of their agreement. Each partner's duties to the others and their share of the profits are spelt out in detail. 

The flexibility of the partnership agreement is a fantastic feature of both general partnerships and LLPs under the law. Since partnerships are not bound by the restrictions of corporation law, people in it can act considerably more flexibly. With very few exceptions, a partnership agreement might include a great deal of information. 

Partnership Agreement Considerations

As a rule, the following may be included in both general and limited liability partnership agreements:

  • The business's official name.
  • How much capital each partner will provide and how much profit each will keep.
  • How much, if any, pay the partners are allowed to take, and how they are responsible for keeping track of it.
  • Which partners are eligible to receive interest payments from the partnership and at what rate.
  • How much time and effort each partner can anticipate to put in, and how decisions will be made, including which choices should be taken jointly and which may be delegated.

Differentiating Limited Liability Partnerships from General Partnerships

The fact that general partnerships are formed instantly sets them apart from limited liability partnerships. However, forming an LLP formally requires you and your partners to perform certain actions. 

Forming a partnership in business

Although it can be quite simple, there is a protocol to be followed while forming a business partnership. Depending on the sort of relationship you're looking to create, they may vary somewhat. 

It's smart to go about potential plans with the people you'll be working with in advance. When forming a business partnership, it's important to think about the following points:

1. Find your business partner

You’re about to run a race: the first thing to do is to identify a potential business partner who complements your team. In most cases, it is even possible to start a firm with more than one person. 

The Partnership Act of 1890 allows for as many as twenty people to be involved in a single partnership. Some businesses like accountancy and real estate organisations may fall outside this rule — you and your potential business partners may want to seek the advice of an attorney who specialises in business law if you have any doubts about this.

Partner candidates should be trustworthy, provide value to the company idea, and be able to commit as much time as you do to making it a success. 

Finding collaborators that have different expertise and experiences from your own might be advantageous. Together, you'll be able to contribute more to the relationship and reap the benefits of a wider range of expertise and life experiences. Perhaps most crucial, look for individuals to work with and have conversations with.

2. Have a clear vision of your company's future

The next thing to do is get very clear on what work your partnership wants to accomplish. This has two different sides to it.

The first consideration is a legal one: determining the form of partnership to be formed. A limited, limited liability, or general partnership is the option here. Talk to your partner about the benefits and drawbacks of each option. 

If a limited liability partnership's yearly revenue is more than £85,000, for instance, the firm must register for Value Added Tax. This is something to think about if you anticipate sales to be higher than that amount. In certain cases, a limited liability company will also hire an auditor.

As for the second consideration: when two people decide to go into a company together, it's usually because they have extensive experience in the same field. This might be due to prior professional experience, personal investment, or contacts in the field — take into account your mutual experience and knowledge to pinpoint the specific segment you can dominate.

3. Make it legally obligating with the other party

After settling on the legal status of your partnership and its primary functions, you should write a partnership agreement to formalise your business relationship — or a LLP Agreement, if that’s what you’ve chosen. 

The regulations for running the partnership are laid forth in these documents. Among the items they contain are how to run the partnership, its decision-making process, how a partner may quit the partnership, respective obligations, capital contributions and the distribution of earnings — this is crucial because, in the absence of an agreement, many areas of your partnership would be governed by legal default rules.

All partners have an equal vote in partnership decisions, partake equally in partnership profits, and bear equally in partnership liabilities when unlimited liability is in effect. Depending on the circumstances, you may want to negotiate changes to these depending on the contributions and responsibilities of each partner. 

Although a formal agreement is not required, it can smoothen future operations and decision-making. The ‘nominated partner' may be selected when a regular partnership is formed. This person sets up the company's tax affairs with HMRC and files the company's tax returns.

4. Obtain a business licence

There are clear-cut procedures that must be followed in order to officially launch your company. These are distinct from one another in light of the nature of the proposed collaboration — so, the next step is licensing.

Registration with HMRC is required to operate as a normal partnership. Your designated partner is accountable for this. A company name and a designated partner are all that is needed to form a partnership. This registration can be completed either online or using a paper SA400 form. Appointing a representative to handle interactions with HMRC on the company's behalf is a viable option.

Companies House is where limited liability partnerships file their formation paperwork. There must be at least two “designated members” and an LLP agreement in place before a company may legally operate in most jurisdictions. Designated members have the same financial responsibilities as nominated partners. 

With Companies House, register the name, address, and both limited and ordinary partners must file. Companies House will register a limited liability partnership or a limited partnership within five business days after receiving an application and a nominal fee.

Which should you choose for low-liability: Limited partnership or limited company?

Unlike general partnerships, members or shareholders of both an LLP and a Limited Company have the protection of limited liability. 

Whether one prefers a more businesslike or collaborative mindset is not a deciding factor. Both corporations and partnerships can, still, be run in a manner that is comparable to that of an informal partnership.

A key need of the selected structure is that it should not stand in the way of doing business, and this is best shown by the fact that the LLP and Limited structures can use quite different business philosophies. 

First and foremost, tax efficiency and the capacity to adapt to the evolving commercial needs of the organisation and its owners are essential. The LLP is a more adaptable structure (and a possible better option) than the other two since it does not need a share capital or regular capital maintenance.

An LLP's revenues are subject to the partners' exclusive discretion when deciding how to distribute them. In contrast, a Limited Liability Company is limited in its ability to distribute profits to its shareholders by the percentages of ownership they actually hold (although this can be worked around through the creation of different classes of shares, so-called alphabet share arrangements).

Why LLP's have adaptability

The LLP is also given some leeway in another important respect: the ability to make distributions quickly and easily. 

Profits, loans, and returned capital may all be distributed by the LLP with little red tape provided there is enough cash on hand to cover the expenses. The Limited Company needs liquid assets to disperse, and it must adhere to stringent lending and return of share capital rules under company law.

The LLP also offers a high degree of adaptability in that new members may be added (and deleted) with relative simplicity. Again, this pliability can be contrasted with the Limited Company's more onerous procedures for admitting new members, replacing directors, and recovering shareholders' stakes.

Most importantly, the LLP may exercise its discretion without incurring any additional tax liability. There are no taxable consequences for either the LLP or its members when earnings are shared, money is returned, or members are added or removed. 

In contrast, for corporations or a Limited Company, shareholders may owe taxes in the event of the payment of dividends, return of capital, transfer of shares between members, or admission of new shareholders under advantageous circumstances. Therefore, at first glance, the LLP seems to be superior to the Limited Company in terms of both flexibility and tax efficiency.

LLC tax implications

A Limited Liability Company, on the other hand, is taxed separately from its stockholders and must pay a 20% corporation tax on its income:

Until gains are dispersed as dividends or returned in liquidation, shareholders do not have to pay tax on them. Therefore, a limited liability company (LLC) provides a significant tax deferral (up to 27%) compared to an LLP, where an individual's marginal income tax rate may be as high as 47%.

But what if the company has to keep some of its earnings in order to finance its expansion and ongoing operations? For all the desired flexibility of the LLP, the Limited Company will be preferred due to the capacity to keep such earnings taxed at corporate rates of 20% rather than gains taxed at marginal rates of income tax as high as 47%.

However, this presumes that the choice between an LLP and a Limited is as simple as weighing the benefits of more flexibility against those of more tax-efficient finance. These are often the most crucial factors to think about; nevertheless, there are situations in which they are not. 

There will never be a “right” solution. Whether a partnership or corporation mentality more accurately represents the connection between the owners will depend on a variety of factors, including, as was hinted at earlier, ‘soft' benefits like tax advantages. 

The most that can be said is that the LLP's adaptability may once again work in its favour in times of uncertainty; after all, it is much easier to successfully get an LLP incorporated into a Limited Company (while keeping things tax-neutral) than trying restructuring the opposite way.

Verdict: Creating business partnerships

Establishing a business partnership between two or more persons can be a straightforward process.  

The lack of limited liability implies that all partners are ‘jointly and severally' responsible for the business's obligations. That is to say, if the company goes under, you can be on the hook for a lot of money.

Running a company can be a solitary endeavour, so finding the perfect partner is important; a partner may be desirable if they can provide resources or skills that you lack. 

Like a limited liability corporation, a limited liability partnership must register with Companies House. You can find detailed instructions on how to set up a partnership on their website. HMRC registration is also required for the LLP.

Limited liability partnerships are taxed in the same manner as commercial partnerships. However, similar to limited liability corporations, limited partnerships are subject to additional paperwork and yearly filing requirements with corporations House.

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FAQs

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