There are some similarities between limited companies and limited liability partnerships, such as the entity being its own legal personality and having limits to liability. However, there are a number of differences to consider when deciding which structured entity is best for your architecture business.
Which limited liability structure is best for your architecture firm?
Summary of the key differences
| Topics | Limited Liability Partnership (LLP) | Limited Company |
| Members | Must have at least two members. New members are admitted by agreement of existing members which can lead to a dilution of profit under a profit-sharing agreement. | A limited company can have one person who acts as both a director and shareholder. New shareholders arise upon the purchase of existing company shares or by allotment of new shares. |
| Administration and management | It is recommended (but not required) to have a formal partnership agreement. Every partner in an LLP has a right to participate in the management of the entity. | No formal agreements are required. The day to day management can be separate from ownership through the establishment of a board of directors. |
| Profits and losses | Can formulate an agreement to split profits and losses between members differently. In general, an LLP is more flexible in terms of profit extraction due to the flexibility to split profits between members as agreed, and this can be amended year to year. The LLP and each member must file self-assessment returns annually (see tax below). | Profits can be left in the company within retained earnings or distributed to the shareholders via dividends, governed by the rights attached to the shares of each shareholder. Dividends can be declared up to the amount of distributable reserves. Losses are entitled to corporation tax credits by offsetting a trading loss against profits from gains from the same or previous periods, with remaining losses being available for offset in the future. |
| Tax | An LLP is not liable to tax, with partners taxed as individuals. All profits are subject to income tax during the financial year, regardless of whether a member takes their profit or leaves it within the business. LLP members pay income tax, national insurance and capital gains tax on all applicable taxable income | Taxable profits generated by the company are taxed at the UK corporation tax rate (25% from April 2023). A limited company is more tax efficient if you make more profit than you need to take out of the business. Shareholders wishing to receive a salary will be subject to income tax just as those in an LLP. They will pay Class 1 NIC on salary which is less tax efficient. |
| R&D | An LLP cannot claim research and development tax credits as any claimant company must be subject to corporation tax. | A limited company is subject to corporation tax and can make a claim for research and development tax credits on their qualifying expenditure. |
| Termination | An LLP can be dissolved through agreement of the members unanimously. Where the LLP becomes insolvent, members of the LLP may propose a voluntary arrangement, apply to put the business into administration or resolve to go into voluntary or compulsory liquidation | A company will remain in existence until it is dissolved or liquidated. When a limited company becomes insolvent, its directors, members or creditors (rules apply) may apply to put the business into administration or resolve to go into voluntary or compulsory liquidation. |
Overall an LLP generally provides more flexibility, particularly with regard to the introduction or withdrawal of members and profit allocations, but the commercial and tax implications require careful consideration as to which structure is most appropriate for a particular architectural business.
We recommend seeking advice before deciding to establish either type of legal entity, so it is tailored to your business, ambitions and personal circumstances. Such advice should also incorporate other factors such as research and development expenditure and succession planning to ensure the right structure is put in place for the long term.