Expanding your business may mean deciding on what to do with your business. Do you want to be a private limited company (LTD) or a limited liability partnership (LLP)? However, before diving in with your answer to that question, let us familiarise ourselves what these two are all about. You need to have an idea of the benefits and consequences if you choose over the other. This is a critical decision that requires extensive research so that all of your hardships will not be put to waste.

Limited Company

This is one of the most popular businesses for all sizes and types of businesses in the United Kingdom. Small businesses usually use this kind of format. A Limited Company simply offers a lot of flexibility. The company can manage their own business or they can hire professional managers on their behalf. An advantage for this kind of format is that they can have as many members are they like since corporations are allowed to be members. They can also enjoy freedom from mandated membership and management reporting requirements that corporations have. It also offers protections for the owner against a possible lawsuit. Because it is considered as a separate entity, creditors cannot seize the owner’s personal assets to satisfy judgement against their business.

One distinct characteristic of a limited company is that the members are not permitted to pay themselves a salary. That is why any money is taken out will be in the form of profit distribution and members should be forced to take distributions if they have no other form of income because if they leave the profits in, they are still required to pay taxes.

When it comes to their taxes, members in a limited company does not pay their taxes. It will be passed through to their members’ individual tax returns just like the partnership. With this, members can avoid the double taxation of corporations as well as receive the tax relief from the performance of their limited company. In other words, in a limited company, any profits earned are taxable only at the corporate level. Owners of the corporation only pay taxes on profits on their personal income tax returns. However, a disadvantage of having a limited company format is that all members must pay taxes on corporate profits even if they do not share in the distribution. It only means that if a member decided not to pull profits out during a given year, they will still be liable for the taxes on a given amount.

Having a limited company also gives a professional and corporate image which will definitely boost the value of the business. There are a lot of corporations and industries who likes to do business with limited companies instead of sole traders mainly because limited companies are already established, credible and committed. They feel a sense of security when transacting to limited companies which make it easier for them to trust the company. In other words, being a limited company can give you a positive brand image that you can use as an advantage. Although having a limited company can have higher administration costs and accounting requirements, the professional and financial gains can cover these drawbacks. Gaining profit can be easier with this format.

However, being a limited company has its drawbacks. One example is the issue about the number of owners. Because there is no limit when it comes to the number of owners, it disallows the organisation to only have one owner. Also, with a limited company, there will be more complex and restrictive rules when it comes to the accounts and bookkeeping. This company will be expected to produce years accounts incorporating a double-entry format, balance sheets and other notes. It makes the accounting time consuming, stressful and it will cost you a certain amount of expenses.

Limited Liability Partnership

A Limited Liability Partnership is a format of a registered company that was originally created to enable the professions to take advantage of the limited liability. However, more and more businesses are moving through this company and it has already gained its popularity among a much wider range of business. It must have at least two designated members, commonly called as “members” who will stand as the company’s primary representatives, just like the Director. With this, the managing partner will have to bear the liability for the partnership’s actions. Whoever is in charge will be legally exposed in the same way owners of a simple partnership are exposed. They also have silent partners and investors which will be receiving liability protection for as long as they do not take a managerial role. In this format, the members are protected with their private assets. It is an advantage because unregistered partnership currently does not have protection if things go wrong. Thus, all of the partners can then be held liable for the debts of the business up to the point of bankrupting the individuals. For limited liability companies, members will only lose the money they have actually invested and does not go beyond that.

When it comes to the tax-related benefits, being a member of an LLP company means you pay the Income Tax as self-employed persons, therefore, there is no need to pay for NI. Rather, all the profit of the company will be considered as the members’ income and are subject to Income Tax. Hence, the balance of tax advantage will depend on how much profit the company might make and how much the owners pay themselves. The credits and deductions of the company will also be passed through to partners to file their individual tax returns. After that, it will be divided by the percentage of individual interest each partner has in the company.

Also, with this kind of format, they offer participants the flexibility in business ownership. The partners have the authority to decide how they will individually contribute to business operations. They can equally divide managerial duties or separate them based on the experience of each partner. They can also choose whether to or not to have any authority over business decisions but will still have ownership rights based on the percentage interest in the company. This flexibility can cause an advantage to those members who does not want to get involve in the decisions of the partnership but will still continue to invest in it. However, when personal interests get involved, this format may bring the partnership down.

Given all of the information above, it is your time to decide whether you’d like to take the path of having a limited company or a limited liability partnership. You just need to assess your business and know what makes it successful. You should always bear in mind the consequences of every decision-making you make for your business.

If you want to look seek professional help from accountants, Eclat Accountncy Ltd can help you with this. We have professional accountants available to address your needs and to help you decide by studying your financial records. By visiting the website, you can see there are a lot of accounting and bookkeeping services that can help you run your business. Book an appointment by visiting the website through here.