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Legal Structures for Business

A Partnership, Limited Liability Partnership or Limited Liability Company? What’s the difference and which one is right for your business?

A Partnership, Limited Liability Partnership or Limited Liability Company? What’s the difference and which one is right for your business?

When setting up your business, there are a number of legal structures which should be considered:

  • The Partnership has historically been the favoured legal structure of professional service firms.
  • There is another type of partnership that should be mentioned. That is the Limited Partnership which is a form of partnership dating back to the Limited Partnerships Act 1907.
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Partnership

The advantage of the traditional partnership is that you keep your financial affairs confidential and have a flexible and benign structure for ownership transition. The downside however is that you are personally liable for the risks of your business, in particular, uninsured trading risks. The partnership also does not have a separate legal identity so partners hold assets and contracts (including leases) in their own names.

Limited Liability Partnership

The LLP combines the flexibility, including fiscal transparency, of the traditional partnership but with the advantage of limited liability.  The LLP has a separate legal identity but, unlike a limited liability company, profits and losses flow through to the partners. You can alter the ratios in which partners share profits without triggering a capital gains tax liability for the owners on a disposal of their partnership shares.  With a company, a transfer of shares can trigger tax liabilities and there can be benefit in kind income tax risks for employees who acquire shares. The fiscal transparency of an LLP may be bad news if you have rising profits that you need to leave in your business to fund its growth.  You will be taxed on profits even where you have been unable to withdraw the cash.

The flexibility on fractional ownership transfers will also generally come at a potential price for the founders of a business.  That price is the failure to recognise the value of the goodwill built by the founder partners.  For certain sectors, including the legal sector, the model has become one in which the goodwill value accrues to the continuing partners as a body.  This proved a highly effective model for growth in a booming economy.  In a post-recession economy where profits need to be invested in innovation and training, the model can be one that exposes a business to a short term focus.  This can prejudice long term investment and financial success. Aside from professional services firms, the LLP can sometimes be a useful structure for joint ventures between companies.

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Limited Partnership

The Limited Partnership or LP is still a popular structure for the private equity and venture capital industry.  The popularity derives from the fiscal transparency needed for investors and the distinction required by law between the special partners, who are responsible for management, and the general partners who simply provide the investment capital.

LLP and LP structures can be used as vehicles to pool investment capital.  Care must be taken though, that the structures do not fall foul of the rules on collective investments and unauthorised unit trusts laid down by the Financial Services and Markets Act 2000 and regulations made under that Act.

Limited Liability Company

The Limited Liability Company is the most popular form of legal structure. The key point to note aside from limited liability to you as owner, is the distinction between owners (the shareholders) and the Directors who are responsible for managing the business on a day to day basis. In small companies, the distinction has little practical significant. But as you grow your company and build your team, the separation of ownership from management becomes important.

Our dedicated team of solicitors, based in Witney, Oxfordshire, would be happy to answer your questions

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