The Culbert Ellis corporate team is frequently called on to advise clients on ways to structure their new business, ensuring that they are tailored effectively to their needs. Two of the most common mediums for businesses in the United Kingdom are the private limited company (“Ltd”) and the limited liability partnership (“LLP”).
The Ltd and the LLP are examples of incorporated entities which are distinct from unincorporated businesses (such as a general partnership).
A Ltd is usually limited by shares and incorporated under the provisions of the Companies Act 2006 (CA 2006). Its incorporated status allows for a legal separation between the Ltd itself, its shareholders (who own the Ltd) and its directors (who manage the Ltd). A Ltd is therefore able to own property, enter contracts, and is liable for its own debts.
LLPs are incorporated under the Limited Liability Partnerships Act 2000 and are jointly owned and run by its members, often referred to as partners. Broadly speaking, an LLP combines the main elements of both general partnerships and Ltds. It too is a separate legal entity, offering limited liability to its members, but it retains the internal flexibility of a general partnership.
Both structures require incorporation by filing documents at UK Registrar of Companies, Companies House.
On incorporation, a Ltd will provide key information such as the name, main business activity, registered office address and more to Companies House. It must also have a Memorandum and Articles of Association outlining the rules in relation to its internal governance which will be available for inspection at Companies House. A Ltd can choose to adopt Model Articles which are standard default articles which companies in the UK can use. Model Articles can be adopted without amendments or modified to suit its specific needs. A Ltd can also adopt completely bespoke articles, provided they comply with the CA 2006.
An LLP provides similar key information to Companies House on incorporation. The workings of an LLP are governed by a private LLP agreement between its members. Unlike a Ltd’s Articles of Association, this does not need to be filed at Companies House and is not available for public inspection. If no agreement is in place, default provisions under the LLP Regulations 2001 apply. These govern profit-sharing, management rights, and decision-making but are often inadequate for more complex businesses.
Incorporation fees for both structures are broadly similar and relatively low, but costs rise with the complexity of creating bespoke articles or LLP agreements and obtaining professional advice.
Both structures are required to make annual filings with Companies House whilst they remain active. Generally, the reporting requirements for LLPs are less strict than for Ltds, particularly with regards to filing annual accounts. Maintaining compliance with these requirements carries ongoing administrative costs for both types of entity.
Both the LLP and Ltd structure shelter the personal assets of their owners and afford them limited liability in the event of liability in the entity itself.
For a Ltd, shares are issued to shareholders who will only be liable for debts up to the value of their shareholding. In an LLP, member’s liability is similarly restricted to the value of their capital contributions.
Individuals involved in the management of these entities (namely a Ltd’s directors and an LLP’s designated members) can be held personally liable if they fail to comply with statutory duties or act improperly.
Directors are subject to a range of duties under the CA 2006 such as to exercise reasonable care, skill and diligence when running the business (s.174). Whilst a breach of these duties won’t always lead to personal liability, in serious cases of misconduct the courts can hold directors personally liable for company debts. For more information, please see the following article.
Designated members of an LLP are members who have been assigned additional responsibilities and duties relating to the administration and management of the LLP and can also become personally liable in specific circumstances. For example, LLP members (particularly designated members) owe fiduciary duties to the LLP and to each other. These include a duty to act in good faith and to account for personal benefits received in the course of business which, if breached, may result in personal liability.
In a Ltd, decision making follows a formal process with clear roles for directors and shareholders set out in the CA 2006 and its Articles of Association. Whilst directors are responsible for the day-to-day management of the company, shareholders are able to make high level decisions such as approving dividends, major structural changes, or removing a director. Governance is more formalised than that of an LLP, with strict record keeping requirements, prescribed roles, and reporting duties.
An LLP affords its members a more flexible internal structure, allowing them to govern themselves according to a private LLP agreement. In the absence of such an agreement, the default rules under the LLP Regulations 2001 apply. Unless otherwise agreed, every member has an equal say in the management of the LLP (regardless of capital contribution), and ordinary business matters are decided by a simple majority. Unanimous consent is reserved for important decisions such as changing the nature of the business or amending the LLP agreement. There is no requirement for formal meetings, board minutes, or secretarial procedures unless these have been voluntarily adopted in an LLP agreement.
Financing your business is an important consideration, and the legal structure you choose can influence the availability, flexibility, and methods of raising capital.
One significant advantage of a Ltd structure is the clear and structured ability to raise finance through both equity and debt. The Ltd can easily issue shares in return for investment and can also borrow money in their own name and offer security over the company by creating charges.
LLPs can sometimes face more constraints on raising finance. LLPs do not issue shares, and bringing in new capital often involves adding a new member which may require a renegotiation of the LLP agreement and changes to any profit-sharing ratios. Capital can also be raised internally through existing members contributing capital, or by retaining profits of the business. The process can be complex and is sometimes considered less attractive to outside investors. LLPs can however borrow money and grant charges over their assets much like with a Ltd.
Both entities are subject to public disclosure requirements. Key documents, such as annual accounts, details of members or shareholders, and confirmation statements, must be filed and are publicly accessible on Companies House. However, whilst a Ltd’s Articles of Association are public, an LLP’s agreement remains private, offering greater confidentiality.
A Ltd is often regarded as carrying greater commercial credibility, especially with external investors and overseas clients, due to the widespread recognition of the corporate form. LLPs on the other hand, whilst increasingly common in professional services and joint ventures, are less well understood in some sectors. Investors generally view Ltds as more investment ready due to their governance structure and clarity around ownership and share transferability.
Choosing between a Ltd and an LLP will depend on the nature of your business, governance preferences, and growth plans.
If you are looking for a structure with formalised governance and easier access to external investment, a Ltd may be more appropriate. If you value internal flexibility, profit-sharing transparency, and a partnership-driven model, an LLP could be the better fit.
At Culbert Ellis, we can help assess your specific circumstances to determine the most effective structure to support your business objectives.
If you require support when setting up your business, or have questions about business structures, please contact us at info@culbertellis.com or call us on +44(0)204 600 9907.
