Difference Between A Company And An LLP

Thinking of starting your own business? When you start your own business, there are many factors that you need to consider. The company's business side is one aspect; however, the formation of a company is an entirely different matter. For instance, what kind of structure do you want to have? A business can be organised into several structures, such as Sole Proprietorship, Partnership, Limited Liability Company or a Limited Company. To make this decision, you need to understand the difference between a Limited Company and a Limited Liability Company. 

An LLP and a limited company share many characteristics, such as having to be registered with their respective Registration offices. Both of these offer limited liability to their owners or partners and consist of complicated reporting and filing requirements compared to other business structures such as Sole Proprietorship and Partnerships. 

Although some critical aspects need to be considered while deciding whether to go for a Limited Company or an LLP. 

Some of the considerations are listed down below for your ease: 

• Taxation applicable on the profits 

• Opportunity to plan your taxation 

• Structural flexibility and rights of the members 

• Opportunities for capital investment 

• The decision of whether to opt for a non-profit or a profit-making company

This decision will also depend on whether you want to run the business alone or with a partner. Each option will offer its benefits regarding the laws of taxation applied to each business model. 

Considering from a tax advantage point of view, a limited company is a better option. In case you want to have a profit-making organization, then a company limited by shares is the better option as you can sell the shares in the future to bring in capital investment. 

What is LLP?

The Limited Liability Company structure came to be to meet the requirements of a community of people who generally opt for traditional partnership, such as the solicitors, architects, doctors, accountants, etc. Choosing a Limited Liability Company is a good option if you intend to have a small number of partners and employees. All the partners or employees have similar rights and responsibilities. They can contribute to the business as the other members, not only that they all get their respective share of the profits. 

Some significant differences between an LLP and a Limited Company: 

Structure of Ownership

• An LLP requires a minimum of two people to set up the business. One method to evade this restriction is to create a second dormant company as an LLP member. 

• In the case of a Limited Company, only one person can set up the business and have the sole authority on all the matters. This person can individually own and manage the company according to his/her will. 

Limited Liability: 

• In an LLP case, each member is liable to pay the amount they agree on if the business runs into financial difficulty or winds up. 

• In a limited company, the shareholders are liable to pay the nominal values or the guarantees they provide. 

Loans and Investments: 

• An LLP can only apply for loans. As it does not have any shares hence, it cannot generate capital via selling shares. 

• A limited company can apply for loans and sell shares to generate capital investment from outside sources. 

Profit Taxation 

Limited Companies Taxations:

• Limited Companies are liable to pay Corporation Tax on taxable income. 

• Corporation tax is not applicable on the Director's salaries. However, they have to pay Income Tax, National Insurance Contributions (NIC), and employers' National Insurance. 

• Directors, however, are shareholders, and they are entitled to the dividends from the shares. Dividends are generated from post-tax profits.

Different countries have different rules on the first dividends; in the UK, for instance, the first 2000 pounds is tax-free. However, dividends are subject to dividend tax.

Limited companies offer many opportunities to save on taxes if you want to reinvest your surplus income into the business. For instance, if you were to add new equipment to your business, you could deduct capital allowances from your taxable income. 

For personal tax savings, you have the liberty to delay the dividend payments until the next year to avoid higher tax rates. 

The above mentioned are examples of how you can make the most saving on taxes within the Limited Company structure. However, you should consult your financial advisor or tax advisor for further advice.

Limited Liability Partnership Taxation: 

• For taxation purposes, LLP members are registered as self-employed, which means they have to pay income tax and NIC based on their profits. These taxes have to be paid regardless of their reinvesting the business's income or taking it as a salary.

• LLPs are not liable to pay employers' National Insurance on their partner's earnings unless they are salaried employees. 

• All of the annual profit is subject to Income Tax and NIC regardless of the members' decision to reinvest the income in the business or keep it. 

Profit Distribution: 

• By nature, LLP's are meant to be set up as a profit-making business hence not suitable for charitable purposes. 

• Limited Companies can be set up as a non-profit organization and as a profit-making organization.

Final Note: An LLP offers a lot more flexibility when it comes to managing the company's internal affairs as the members can draw up a legal document or can decide upon the duties, profits entitlement, and rights amongst themselves verbally as well. However, having a written agreement makes things easier to run.