Today, we are helping you understand major differences between LLP VS LTD. There are so many similarities that LTD and LLP share and the most common is reduced financial responsibilities of the owner. However, they also have major differences including:
- Capital investment opportunities.
- Flexibility of internal structure and members’ rights.
- The allocation and taxation of business profits.
You can choose your legal structure in accordance with your current business or future business plan.
LLP VS LTD
What is a Limited Company?
A limited company is a private company that is completely separate from its owners, owned by shareholders and managed by directors. Private limited companies provide limited liabilities to its members, a private company has a separate identity to its shareholders and directors. Also, a limited company will be limited in terms of shares or guarantee, it will be paying corporation tax on all profits, having a UK address, a bank account that can sell shares for profit and gives a dividend to investors.
What is Limited Liability Partnership?
Limited liability partnership is also known as LLP that involves some or all company’s partners and everybody shares limited liabilities. This legal structure was introduced in 2001 by the LLP act 2000 and it is effective for the companies that mostly operates as partnerships similar to accountancy firms or lawyers.
LLP is not different from any other partnership in terms of tax liability, but it offers a reduced financial liability for each partner means, one partner is not responsible for other partner’s negligence or misconduct.
In addition, LLP is a legal structure that you cannot setup for non-profit organisations, they are designed for profit organisations. However, you can setup a non-profit company by using LTD company setup.
Major Differences Between a Limited Company and an LLP
- A limited company can be owned, registered and managed by only one individual, a single person can act as the director and shareholder at the same time. However, there must be at least two members required to setup an LLP. However, you can also set up a sleeping limited company as the second LLP member.
- In a limited company, the liabilities of company’s guarantors or shareholders is limited to their shares amount (paid or unpaid). In LLP, the liabilities of the members is limited to the amount each member guarantees to pay in case, if the business will face financial loss.
- A limited company is allowed to borrow both loans and capital from outside investors whereas, an LLP is only allowed to receive loan capital. Also, LLP is not allowed to offer equity shares in the business to non-LLP members.
- A limited company is bound to pay all the Corporation tax and Capital Gains Tax on all of their taxable income on the other hand, LLP members only pay income tax, national insurance and CGT on all taxable income. Also, LLP itself is free from tax liability.
- Changing internal management structure and distribution of profits is easy and flexible in an LLP system.
- A limited company can be set up as a non-profit business whereas, an LLP is bound to be set up with profit making intentions.
Difference of Tax Liabilities of LLPs and Limited Companies
A limited company is bound to pay a corporation tax which is 19% of their all taxable income. Any salary transferred to the director is liable for income tax, national insurance and employers NI. Also, directors are shareholders in most cases, that’s why they are consider as the employee of their own company due to this reason, much of their received profit is not subject to corporation tax or personal income tax.
In addition, by paying a director’s salary that is not more than his tax-free personal allowance, also, by distributing additional profits as shareholder dividends, a director will legally be able to reduce his personal tax liability. Dividends are issued from post-tax profit and the amount of tax you’ll pay on your dividends is completely depends on how much you draw. However, first £5,000 of this will be tax-free, known as your dividend allowance. Additional dividend income is taxed at according to the tax bracket of the recipient.
LLP Tax Liability
The members of LLP are considered as self-employed individuals, they are bound to pay income tax and national insurance on their particular profits no matter, whether they take all the profits as salary or add some of it in business Plus, they have to register for self-assessment but they are not legally liable for Employers’ National insurance on their income.
The tax liability of LLP members can be high, depends upon the generated profit amount. In case, if the income of an LLP member exceeds the personal tax-free allowance then the member will be subject to the following income tax rates:
- 20% on taxable income up to £33,500 (you will start paying this rate on income above the £11,500 Personal Allowance threshold).
- 40% on taxable income between £33,501 – £150,000 (you will start paying this rate on income over £43,000).
- 45% on income over £150,000.
Which One Is More Tax Efficient?
In LTD Company, you can generate annual profit more than you need to take out of your business, in this way, a limited company will be more tax efficient. You don’t have to withdraw all of your surplus income straightaway, instead of this, you can leave an amount of profit in the business and comply tax by withdrawing the surplus in a future tax year.