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Use of Limited Liability Partnership for Property Business

Published by UK Property Accountants
Published Date: June 12, 2023

A Limited Liability Partnership (LLP) is an entity formed by two or more individuals under Limited Liability Partnership Act 2000. In an LLP, like a company, the liability of its members is limited to the amount contributed. Partners will not be personally responsible to pay the debts which the LLP is unable to settle.

But unlike the company, the profit earned by the Limited Liability Partnership business is shared among the partners and count as their personal income (rather than income of LLP itself). So, LLP do not pay corporation tax.

Whether choosing an LLP for property business depends on different factors.

Why LLP Instead of Company?

  • Tax planning opportunity for family members: Where the family members form an LLP company, and one partner falls under higher rate and another under lower rate, they can form LLP with such a profit-sharing ratio so as to divert more of the profit to low-income partner. They can change the ratio year by year easily (the change is difficult in case of companies).
  • Pension contributionProfits earned from LLP can be included as relevant earning for the purpose of pension contribution. The more the relevant earnings, the more an individual can contribute to pension and save tax. Company profit earned through property investment does not count as relevant earning, hence no tax advantage.
  • No double tax: Company shareholders face tax in two stages, once as corporation tax in profit the company earns, then as dividend tax (on the dividend withdrawn). LLP members pay tax only once as “Income Tax”.
  • National Insurance contribution (NIC): LLP pays class 2 insurance (£3.15 per week) and class 4 insurance of (9.73% for £11,908 to £50,270 and 2.73% above £50,270). Companies pay class 1 insurance on salaries (13.8% above £9,100 which is more than class 2 and 4 together). So, LLP is cheaper in terms of NIC.

Why LLP Instead of General Partnership?

Protection From Liability: 

In a traditional partnership, the partners are personally liable to settle the unpaid partnership debts and liabilities. But an LLP is legally separate from the partners. If LLP itself cannot pay all the debts, the partners are not required to pay the debts personally. 

A Legal Form

 A general partnership, not having a legal form, faces difficulties in carrying out trade or investment of high volume or entering into lease or any major contracts. LLP on the other hand, being an independent legal entity, can enter into contracts and run business of any nature and volume.

A Protected Identity

As LLP name is registered in the Companies House, no other LLPs can use the same name. This protects goodwill and brand from being fraudulently misused by others.

Easy Entry or Exit of Members

 No tax consequence for LLP when a new member is in or an old exit. In case of companies, selling shares to a new shareholder might have tax implications.

In certain cases, LLP is the best option. But there are many conditions under which, a company or a general partnership work better than an LLP.

Why Company Instead of LLP?

  • Interest relief: Interest on the loan the partner receives (to invest in property investment LLP) is non-deductible- ITA s398 2(b). Even when LLP itself borrows for property investment, there is restriction in interest expenses like for individuals.
  • Financing opportunities: Compared to companies, borrowing for LLPs is not easy. Lenders consider LLP as risky in terms of recoverability to the loan (as the partners are not personally liable to debt).
  • Retention of profit: The shareholders can retain company’s profit (after paying tax) for future use, but the LLP cannot (as all profits are allocated to the partners in the same tax year).
  • Minimum partners/members: At least two members are necessary to form an LLP. You solely can form a company.
  • Raising fund: As LLP cannot issue shares, raising capital from outsiders is difficult. Similarly, any outsiders who invest in LLP will not get tax benefit through Enterprise Investment Scheme or Seed Enterprise Investment Scheme (which would be available for investing in company). So, LLP cannot raise fund as easily as company.

Why a General Partnership Instead of LLP?

01

Compliance Requirement

Unlike the general partnership, LLPs need to file accounts (abbreviated accounts for small LLPs) every year to the companies’ house. Filing is compulsory even when LLP is inactive. Similarly, changes in business address, contribution of capital or loan, addition or removal of members should also be updated at least annually through confirmation statement.

02

Privacy Issues

By default, the correspondence addresses of the partners are publicly available in Companies House record. So, confidentiality might be compromised. You can register your correspondence to be your agent’s address, but it incurs cost.

03

Loss Relief Restriction

LLP may not be beneficial where business faces loss. The partners of a general partnership can set off partnership losses with other income and capital gains (s.64/72, ITA 2007, s.71 ITA 2007, s.261TCGA 1992). But in case of an LLP, relief is restricted to the partner’s respective capital contribution.

Frequently asked questions

How to register LLP?

LLP members (meaning the partners), should fill up an incorporation document (form LL IN010) and submit to Companies House online. While setting up an LLP, the members can form a legal document “LLP members’ agreement” which clarifies the duties, rights and profit allocation ratios of members.

What does limited liability mean in business?

The concept of limited liability applies to companies. If the capital of the company is insufficient to settle all the debts, loans or financial obligations, then the shareholders will not be personally liable for such debts or loans or financial obligation. Here, the liability of the shareholders is limited to the capital they injected.

Can partners in a UK LLP take a salary?

Yes. But salaries are not deductible when calculating taxable profit of an LLP.

Who owns assets in an LLP?

LLP being a separate entity as per law, can own assets and generate income from it.

What is the difference between Limited Partnership and Limited Liability Partnership?

A Limited Partnership is a hybrid of LLP and general partnership. There are two kinds of partners having different roles:

General Partner

(at least one)

Limited Partner

(at least one)

Liability is not limited like in normal partnership

Liability is limited like in LLP

Carries on the management of partnership business

Restricted from carrying on the management of the partnership

Let's Start a Conversation 

Considering a Limited Liability Partnership for your property business? Let's discuss your possibilities. Contact us now for personalized guidance and information.

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