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Navigating the New Dynamics of Forming an LLP in the UK: 2023 Update

December 1, 2023
Amal Eeckhout
updated information about llps in uk

In the evolving landscape of UK business structures, the Limited Liability Partnership (LLP) continues to stand out as a preferred option, especially within the realms of professional services. Its enduring popularity stems from a blend of flexibility, liability protection, and distinct legal characteristics that align well with the dynamic needs of modern businesses. This adaptability makes the LLP an appealing model for a range of enterprises, from start-ups to established firms, seeking a harmonious balance between operational freedom and legal security.

Navigating the Incorporation Process of an LLP in the UK

Forming a Limited Liability Partnership (LLP) in the UK is a strategic choice for many businesses due to its blend of a partnership's flexibility and a company's limited liability. This hybrid structure combines organizational adaptability with a safeguard against personal liabilities for its members​​.

Eligibility and Incorporation: To form an LLP, at least two persons (individuals or companies) must associate to carry on a lawful business with a profit motive. However, LLPs are not suited for non-profit activities​​. The incorporation process can be undertaken electronically through software or by paper filing, with respective fees and processing times. The standard electronic filing fee is £10, usually processed within 24 hours, while paper filing costs £40 and takes about five days​​.

Documentation and Registration: Incorporating an LLP requires completing the "Application to register a limited liability partnership" (form LL IN01), which includes details like the LLP's name, registered office, members, and people with significant control. This form, along with the required fee, is submitted to Companies House​​. The registered office of the LLP must be a physical location in the UK for correspondence and legal notices​​.

Statutory Registers and Certificate of Incorporation: LLPs can opt to not maintain certain statutory registers but instead send this information to Companies House for public record. This election includes registers like members, people with significant control, and members' usual residential addresses​​. Once the application is approved and the fee paid, Companies House registers the LLP and issues a certificate of incorporation, a conclusive evidence of legal registration​​.

Designated Members and Their Responsibilities: Every LLP must have at least two formally appointed designated members responsible for crucial tasks such as appointing auditors, signing accounts, and ensuring legal compliance. If the LLP has fewer than two designated members, all members are deemed designated members​​. Restrictions apply to who can be a member, ensuring that only eligible individuals or entities partake in the LLP​​.

Naming the LLP: Choosing an appropriate name for an LLP requires ensuring it is not identical or too similar to existing names or trademarks. The name must also adhere to restrictions on the use of certain words and expressions that suggest a legal structure or imply government affiliation. Sensitive words and expressions in the name require approval by the Secretary of State​​.

Benefits of an LLP in the UK

  1. Flexibility in Management and Profit Sharing: LLPs offer significant flexibility, allowing partners to determine contract terms, profit shares, and management processes. This adaptability is a key advantage over more rigid corporate structures​​.
  2. Exclusive Company Name: Registering an LLP at the Companies House secures the exclusivity of the business name, preventing other companies or partnerships from using it​​.
  3. Privacy and Member Protection: An LLP can appoint corporate entities as members, offering a level of privacy by keeping individual identities confidential. Additionally, the personal assets of the members are shielded from the liabilities of the business, distinguishing it from limited partnerships where personal assets can be at risk​​.
  4. Tax Benefits: Members of an LLP are treated as self-employed, providing tax advantages, as they are considered partners in a business partnership​​.
  5. Operational Continuity: The resignation, bankruptcy, or death of a member does not necessitate the dissolution of the business, allowing for uninterrupted trading during challenging times​​.

Challenges of Forming an LLP in the UK

  1. Public Disclosure Requirements: Financial documents and accounts of an LLP must be filed at Companies House, making them public record. This lack of privacy can be a significant concern, especially regarding the disclosure of partners' incomes​​.
  2. Dependency on Multiple Members: An LLP requires a minimum of two members at all times. The departure of a member could lead to dissolution if the LLP is left with only one member​​.
  3. Higher Costs and Compliance Burdens: Establishing an LLP often involves more expenses and compliance responsibilities compared to a regular partnership, including additional reporting and accounting requirements​​.

Recent Developments and Brexit Implications

  1. Post-Brexit Regulatory Challenges: Brexit has significantly impacted LLPs, especially in professional services like law and auditing. The UK's withdrawal from the EU has resulted in the UK being subject to multiple different regulatory regimes across EU member states. This has led to disruptions, particularly for UK-based solicitors who now need local licensing to practice EU law​​.
  2. EU VAT Reforms Impact: The EU's VAT tax reforms, effective from July 1, 2021, present new challenges for UK-based LLPs, especially in e-commerce. These reforms include the introduction of new VAT reporting platforms (IOSS and OSS) and may require UK businesses to appoint a fiscal representative for non-resident VAT returns in various EU countries​​.

The formation of an LLP in the UK in 2023 presents a mix of traditional benefits, such as operational flexibility and tax advantages, alongside new challenges brought on by Brexit and changes in EU regulations. These factors must be carefully considered by anyone looking to establish an LLP in the current business climate.

Advantages and Challenges of Forming an LLP in the UK in 2023

Advantages of an LLP

  1. Legal Entity Status: LLPs are separate legal entities from their members, enabling them to hold property, enter contracts, and sue in their name​​.
  2. Limited Liability: Members' liability is limited to their investment in the business, protecting personal assets from business debts, except in certain situations​​.
  3. Flexibility in Management: LLPs offer organizational flexibility similar to partnerships, allowing members to decide on profit sharing, management responsibilities, and the appointment of new members​​.
  4. Confidentiality: LLP agreements are confidential, not required to be filed publicly, providing privacy in operational agreements​​.
  5. Floating Charges: LLPs can create floating charges over their property and assets, useful for securing capital​​.
  6. Tax Benefits: Profits are personal income of each member, avoiding double taxation seen in limited companies​​.
  7. Collective Investment Schemes: LLPs can register as collective investment schemes under certain conditions, broadening investment opportunities​​.

Challenges of Forming an LLP

  1. Public Disclosure: LLPs must submit financial accounts annually to Companies House, making personal incomes of partners public​​.
  2. Higher Administrative and Setup Costs: LLPs incur higher overall administration and setup costs compared to traditional partnerships​​.
  3. Professional Body Restrictions: Some professional bodies may not permit their members to operate under an LLP​​.
  4. Liability Contributions: In specific circumstances, LLP partners may need to contribute to the business's liabilities​​.
  5. Reporting Requirements: LLPs must meet strict reporting requirements, including filing individual accounts for each member, group accounts, VAT returns, and maintaining various registers​​.

Post-Brexit Implications

  1. Regulatory Changes: The UK's exit from the EU has led to significant changes in the corporate landscape, especially affecting solicitors and auditing firms in LLPs. They now face different regulatory regimes and licensing requirements across EU states​​.
  2. EU VAT Reforms: The introduction of new VAT reporting platforms (IOSS and OSS) following EU's VAT tax reforms has added complexity for UK-based LLPs, especially in e-commerce, requiring streamlined VAT reporting procedures and potentially the appointment of a fiscal representative in the EU​​.

The landscape for forming an LLP in the UK in 2023 presents a balanced mix of traditional benefits such as operational flexibility and tax advantages, alongside new challenges brought on by Brexit and changes in EU regulations. These factors must be carefully weighed by anyone considering establishing an LLP in the current business environment.