LLP vs limited company: tax, liability and which to choose

An LLP is a body corporate with limited liability, but it is transparent for tax. It pays no corporation tax. Profit is allocated to members and each pays income tax and National Insurance on their share, whether or not they draw it.

A limited company pays corporation tax on its profit at 19% to 25%, then shareholders pay personally only on what they take out. That means a company can retain profit at a lower rate, while an LLP cannot shelter anything.

Where all profit is drawn each year and there is nothing to retain, the LLP is often no worse on tax and considerably simpler to run, with no dividends, no director loan account and no section 455 charge.

Flexibility on profit sharing is the real attraction. Members can agree different shares each year without issuing share classes or declaring dividends, which suits professional firms with changing seniority and property joint ventures with different contributions.

Losses in early years pass straight to members and can often be relieved against their other income, where a company would carry them forward.

Where profit is retained to fund growth, buy assets or build reserves, corporation tax at 19% to 25% beats income tax at 40% or 45% on profit you never touched.

Companies also handle outside investment better: share classes, EMI options, SEIS and EIS reliefs and a clean cap table are all company features. Investors rarely want LLP membership.

Both file accounts at Companies House and both are on the public record, so an LLP is not more private than a company. Both file a confirmation statement and maintain a PSC register.

The LLP-specific risk is the salaried member rules. Where a member's reward is at least 80% fixed, they have no significant influence, and their capital contribution is under 25% of expected reward, they are taxed as an employee with PAYE and 15% employer National Insurance. Fixed-share members need this tested, not assumed.