Source-based general information, not professional advice. How we research and review
A limited liability partnership (LLP) combines partnership-style flexibility with limited liability for its members, and is tax-transparent, meaning profits are taxed on the members individually rather than the LLP itself paying Corporation Tax. A limited company is a separate taxable entity owned by shareholders and run by directors. Neither is universally better: LLPs commonly suit professional and investment partnerships with several active members sharing profits directly, while companies suit businesses that want to retain profits, raise external equity, or operate with a simpler single-owner structure.
Understand the legal shape of each structure
An LLP is a body corporate with its own legal personality, registered at Companies House, but it is structured and run as a partnership between its members under an LLP agreement. Members share in profits according to that agreement rather than through shares and dividends.
A limited company is also a body corporate with its own legal personality, but it is owned by shareholders and managed by directors under the Companies Act and its articles of association. Ownership (shares) and management (directors) can be separated or combined, and profits are distributed as dividends after Corporation Tax.
Compare the structures across key features
Use this comparison as a starting point and test it against your actual number of owners, how you want profits taxed, and whether you plan to raise external investment.
| Feature | LLP | Limited company |
|---|---|---|
| Legal personality | Separate legal entity, body corporate | Separate legal entity, body corporate |
| Owners | Members, governed by an LLP agreement | Shareholders, governed by articles of association |
| Liability | Generally limited to capital contributed, subject to the agreement | Generally limited to amount unpaid on shares |
| Taxation | Tax-transparent; members taxed individually on their share of profit | Company pays Corporation Tax; shareholders taxed separately on dividends or salary |
| Profit retention | Profits are generally allocated and taxed on members as earned, limiting retention | Company can retain post-tax profit for reinvestment |
| External equity investment | Less commonly used for outside equity investors | Shares are the standard vehicle for outside equity investment |
Designated members carry extra administrative duties
Every LLP must have at least two designated members, who take on specific administrative responsibilities broadly comparable to a company director’s filing duties: signing and filing accounts, notifying Companies House of changes, appointing an auditor where required, and acting if the LLP is wound up.
An LLP agreement should set out how designated members are chosen, their relationship with ordinary members, and what happens if membership changes. Unlike a company’s model articles, there is no simple statutory default agreement; LLP agreements are usually bespoke and should be drafted or reviewed by a solicitor.
- Identify at least two designated members and record their role clearly.
- Draft or commission a proper LLP agreement rather than relying on informal understanding.
- Set out profit-sharing, capital contributions and decision-making in the agreement.
- Review what happens if a member leaves, retires, or the LLP needs to admit a new member.
Work through what tax transparency actually means
Because an LLP is tax-transparent, it does not pay Corporation Tax itself. Instead, each member is taxed on their share of the LLP’s profits as if they were a partner in an ordinary partnership, generally through Income Tax and Class 2/4 National Insurance contributions (or Corporation Tax if the member is itself a company). This differs fundamentally from a limited company, where the company is taxed first and the owner is taxed again, separately, on what they draw out.
Tax transparency can simplify matters where members want profits to flow directly to them as earned, but it removes the option to leave profit inside the entity taxed only at the Corporation Tax rate; LLP members are generally taxed on their profit share whether or not they actually draw out cash. Anyone comparing structures purely for tax reasons should get advice using realistic profit projections rather than relying on generic comparisons.
Compare the ongoing filing and compliance duties
Both structures file a confirmation statement and annual accounts at Companies House, and both appear on the public register with broadly similar transparency expectations, including accounts filing deadlines and late filing penalties. An LLP’s equivalent of a company’s statement of capital and shareholding information is its register of members and designated members.
Neither structure avoids the ECCTA identity verification requirements that now apply to key individuals; members and designated members of an LLP, like directors and PSCs of a company, are affected by the wider Companies House transparency reforms, so check current guidance for the LLP-specific position.
- 1
Decide which structure fits your ownership and tax goals before registering.
- 2
If choosing an LLP, draft a tailored LLP agreement covering profit-sharing and exit.
- 3
If choosing a company, agree shareholder arrangements, ideally in a shareholders’ agreement.
- 4
Register the chosen entity at Companies House and set up the relevant internal registers.
- 5
Confirm current identity verification and filing obligations for the structure chosen.
Match the structure to how the business will actually work
LLPs are commonly used by professional practices such as law, accountancy and consultancy firms, and by investment or joint-venture vehicles with several active participants who want to share profits directly and flexibly under a negotiated agreement. They can suit situations where partners want transparent, direct profit allocation without a second layer of company-level tax.
Limited companies are generally better suited to a business that wants to retain profit for growth, bring in external equity investors through share issues, offer share-based incentives to employees, or operate simply with a single founder as both sole director and shareholder. A company structure is also far more familiar to most external investors and lenders, which can smooth fundraising.
| Situation | Structure that commonly fits better | Why |
|---|---|---|
| Several professionals sharing profit from active work | LLP | Direct, flexible profit allocation and tax transparency |
| Founder wants to raise external equity investment | Limited company | Shares are the standard, well-understood investment vehicle |
| Single founder running the business alone | Limited company | Simpler single-owner structure with well-established model articles |
| Joint venture between a small number of established businesses | LLP or company | Depends on tax position and whether external investment is planned |
Worked example: choosing between the two structures
Illustrative scenario: three experienced consultants want to set up a practice together, sharing profits roughly according to the work each brings in, with no plan to raise outside equity. An LLP allows them to agree a flexible profit-sharing formula and have profits taxed directly on each of them as earned, without a company-level tax layer.
By contrast, a technology founder building a product business that will need external investment and wants to retain early profit to fund growth is generally better served by a limited company, since investors expect shares, option schemes assume a company structure, and retained profit can be taxed once at the Corporation Tax rate rather than flowing straight through to the founder’s personal tax position.
Your next steps
- Decide how many owners there will be and how actively each will work in the business.
- Compare tax transparency against company taxation using realistic profit figures.
- Check whether you plan to raise external equity investment.
- If choosing an LLP, commission a bespoke LLP agreement rather than using informal terms.
- If choosing a company, consider a shareholders’ agreement alongside the articles.
- Confirm designated member or director appointments and record them properly.
- Check current identity verification requirements for the structure chosen.
- Get professional advice before switching between structures once trading has started.
Common questions
Does an LLP give the same limited liability as a company?+
Broadly, yes: members are generally not personally liable for the LLP’s debts beyond their agreed capital contribution, similar in principle to a shareholder’s limited liability, though the detail depends on the LLP agreement and circumstances such as personal guarantees given separately.
Can an LLP have only one member?+
No. An LLP must have at least two members at all times (reducing to one for a short permitted period can lead to personal liability for that sole remaining member for the LLP’s debts incurred during that time).
Does an LLP pay Corporation Tax?+
No. An LLP is tax-transparent, so profits are taxed on the members individually rather than at the LLP level, unlike a limited company which pays Corporation Tax on its profits before any distribution.
Can I convert a limited company into an LLP later?+
There is no simple direct conversion process; moving a business between structures generally involves transferring the trade, assets and contracts to the new entity, with potential tax and legal consequences that need proper advice.
Do LLPs file accounts publicly like companies?+
Yes. LLPs must file accounts and a confirmation statement at Companies House on broadly similar timelines to companies, and the same transparency reforms affecting companies generally extend to LLPs.
Is an LLP agreement a legal requirement?+
There is no legal requirement to have a written LLP agreement, but without one, default statutory provisions apply which are often unsuitable for a real business; a bespoke written agreement is strongly advisable.
Official sources & further reading
This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.
- GOV.UK: Set up and run a limited liability partnership (LLP)
- GOV.UK: Register an LLP
- GOV.UK: Set up a limited company
General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.
About the author
Alex Morgan · Company Formation Offers
Alex leads our coverage of the decisions founders make before and during incorporation: choosing between sole trader and limited company, checking a company name, selecting SIC codes, allocating shares, appointing directors and recording people with significant control. Alex writes step-by-step guides that separate what the law requires from what providers sell as optional extras, so readers can see exactly what they need to pay for.
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