What is a limited liability partnership (LLP)?

Explanation of limited liability partnership (LLP)

An LLP is incorporated under the Limited Liability Partnerships Act 2000 and must be registered at Companies House. Unlike a traditional partnership, an LLP has its own legal identity separate from its members. This means it can own assets, enter contracts and incur liabilities in its own name.

Members of an LLP benefit from limited liability, meaning their personal financial exposure is generally limited to the amount they have agreed to contribute to the LLP. However, members may still be personally liable for their own negligence or wrongful acts.

For tax purposes, an LLP is usually treated as transparent. The LLP itself is not typically subject to corporation tax. Instead, profits are allocated to members, who are taxed individually on their share, similar to a general partnership.

LLPs are commonly used by professional services firms, including accountancy and legal practices, due to the flexibility of internal arrangements and limited liability protection.

Key characteristics of a limited liability partnership (LLP)

Key characteristics of a limited liability partnership (LLP) include the following:

• It is a separate legal entity distinct from its members.
• Members generally have limited liability for business debts.
• It must be incorporated and registered at Companies House.
• It is usually tax transparent, with members taxed on their share of profits.
• It requires at least two members to be incorporated.

How a limited liability partnership (LLP) works

A limited liability partnership (LLP) works through the following conceptual stages:

1. Two or more persons incorporate the LLP by registering it with Companies House.
2. An LLP agreement sets out how profits, decision-making and responsibilities are shared.
3. The LLP conducts business in its own name and enters contracts.
4. Profits are allocated to members in accordance with the LLP agreement.
5. Members are taxed individually on their allocated share of profits.

Example of a limited liability partnership (LLP) in practice

A group of consultants forms an LLP to provide advisory services. The LLP signs contracts with clients and receives fees in its own name. After expenses, profits are divided between members according to the LLP agreement, and each member reports their share on their personal tax return.