What is a Limited Liability Partnership? A Basic Guide

A limited liability partnership (LLP) is a business structure that gives its members limited liability like a company, but is taxed like a partnership. Members share profits and each is taxed as self-employed on their share, while the LLP itself is a separate legal entity registered at Companies House. LLPs are popular with professional firms such as solicitors, accountants and architects.

This guide explains how an LLP works, who the members are, how it is taxed, what an LLP agreement covers, the advantages and disadvantages, the rules on salaried members and how an LLP compares with a limited company and a traditional partnership. For the other main structures, see our limited company pros and cons and how to register as a sole trader.

LLP at a glance

Members and designated members

An LLP must have at least two members. Members can be individuals or companies. At least two members must be designated members, who take on extra legal responsibilities, such as filing the LLP’s accounts and confirmation statement with Companies House, appointing auditors where required and delivering information to the registrar. If an LLP does not name designated members, all members are treated as designated.

How an LLP is taxed

An LLP does not pay Income Tax or Corporation Tax on profit in its own right, apart from certain exceptions. Instead, each member is taxed on their share of the profit as if they were self-employed, whether or not they draw it out. Members pay income tax at 20%, 40% or 45% and Class 4 National Insurance of 6% and 2% on their share. The LLP files a partnership tax return, and each member reports their share on their own Self Assessment return. Read our Self Assessment guide and Making Tax Digital guide because members may fall into MTD for Income Tax if their qualifying income is above the thresholds.

The LLP agreement

The LLP agreement is the contract between members that sets out how the business is run. It is not filed publicly, but it is crucial. A good agreement covers each member’s capital contribution and profit share, who has authority to make decisions, how profits are drawn, what happens if a member leaves or dies, how disputes are resolved and how new members join. Without an agreement, default rules in the legislation apply, which may not suit you.

Advantages of an LLP

• Limited liability for members, usually limited to their agreed contribution.
• Flexibility in sharing profits and running the business through the LLP agreement.
• Tax transparency, with profits taxed on members rather than twice.
• Professional credibility, especially for regulated professions.
• Separate legal identity, allowing the LLP to own assets and sign contracts.

Disadvantages of an LLP

• Public accounts. LLPs must file accounts at Companies House, which are publicly available.
• Admin and cost. More filing than a simple partnership, including a confirmation statement.
• Members pay tax on their share whether or not they take the cash, so you must plan for tax.
• Salaried member rules may treat some members as employees.
• Less suited to retaining profit, as members are taxed on their share regardless.

The salaried member rules

HMRC treats an individual LLP member as an employee for tax purposes if three conditions are met: it is reasonable to expect that at least 80% of their reward is a fixed amount or varies without reference to the LLP’s profits, they do not have significant influence over the LLP’s affairs and their capital contribution is less than 25% of their disguised salary. If all three apply, the LLP must operate PAYE and pay employer National Insurance on their pay. This stops firms using LLP status to avoid payroll taxes for what are in reality employees. Check each member against the tests when you set up the LLP.

LLP vs limited company vs partnership

How to set up an LLP

1. Agree who the members and designated members will be, and their contributions and profit shares.
2. Choose a name ending in LLP, Limited Liability Partnership or the Welsh equivalent.
3. Prepare an LLP agreement with legal advice.
4. Register with Companies House, giving a registered office address and details of members.
5. Verify identities of members and people with significant control.
6. Register for Self Assessment, and for VAT and PAYE if needed.
7. Open a business bank account and set up bookkeeping.

LLPs in London

London is home to many LLPs, particularly law firms, accountancy practices, architects, consultancies and investment businesses in areas such as the City, Westminster and Camden. Members often have high incomes, so tax planning, pensions and the salaried member rules are important. We support LLPs and their members across all boroughs with accounts, tax returns and advice. See Westminster, Camden and our borough pages, or contact us about packages.

Common mistakes with LLPs

• Not having a written LLP agreement.
• Not planning for members’ personal tax on profits not drawn.
• Missing the salaried member tests.
• Forgetting filing deadlines at Companies House.
• Not verifying members’ identities.

A worked example of LLP tax

An LLP has two equal members and £120,000 of profit for the year. Each member is allocated £60,000 and is taxed on it as self-employed income whether or not they draw it out. Each pays income tax and Class 4 National Insurance on that £60,000 through their own Self Assessment return, and the LLP files a partnership return showing the split. If one member draws only £30,000 but is taxed on £60,000, they must still pay tax on the full share, so the LLP agreement should provide for tax drawings.

Closing or changing an LLP

Members can join or leave by following the LLP agreement and filing changes with Companies House. An LLP can be dissolved by striking it off, if it is solvent and has stopped trading, or wound up through a liquidation process. When a member leaves, consider how their capital is repaid, how profits to the leaving date are calculated and how outstanding tax liabilities are dealt with. Planning these points in the agreement avoids disputes.

Frequently asked questions

What is an LLP?

A limited liability partnership is a business structure with limited liability for members that is taxed like a partnership.

How many members does an LLP need?

At least two, including at least two designated members.

How is an LLP taxed?

Members pay income tax and Class 4 National Insurance on their share of the profit as self-employed individuals.

Do LLPs have to file accounts?

Yes. LLPs file annual accounts and a confirmation statement at Companies House.

Is an LLP better than a limited company?

It depends. LLPs suit professional partnerships and flexible profit sharing, while companies suit owners who want to retain profit and have shareholders.