There are various types of business structures, each with its own set of advantages and disadvantages. Among these are limited companies and partnerships, along with their respective subcategories. If you work in business development or are considering starting your own venture, understanding the differences between these structures can be beneficial. In this article, we will compare partnerships and limited companies, explain the different types within each structure, outline the key distinctions, and address some frequently asked questions.
Partnership vs. Limited CompanyUnderstanding the differences between a partnership and a limited company is essential if you’re considering starting your own business or are involved in business development. These are two common business structures, with a third option being a sole trader.
One of the primary distinctions is that all types of limited companies provide limited liability for their shareholders. In contrast, partnerships do not issue shares, and some types can involve unlimited liability.
Additionally, partners in a partnership both own and actively manage the business, whereas, in a limited company, shareholders own the business, but directors are responsible for its day-to-day operations.
Partnership types: -General Partnership- Limited Partnership (LP)- Limited Liability Partnership (LLP)
General PartnershipA general partnership involves multiple owners who share joint responsibility for managing the business, as well as its profits, losses, and expenses. In this arrangement, the partners have unlimited liability, meaning they are personally responsible for any debts the business incurs. Unlike companies, the partnership itself does not pay taxes on its income; instead, each partner pays income tax and national insurance on their individual share of the profits.
Limited Partnership (LP)Unlike a general partnership, a limited partnership has to register the business at Companies House, in addition to registering with HMRC for self-assessment.They also differ from general partnerships because they have some ongoing filing requirements, although they share the fact that the partnership agreement is private and non-mandatory.A Limited Partnership (LP) consists of both general and limited partners, with at least one of each required. These partners have different levels of liability and responsibilities. All partners pay tax on their respective shares of the profits.• Limited partners contribute to the business’s initial costs and are only liable for the amount they invested. However, they cannot manage the business directly or withdraw their original investment.• General partners have unlimited liability, actively run the business, and make binding decisions, similar to partners in a general partnership.Unlike general partnerships, LPs must register with Companies House and also register with HMRC for self-assessment. LPs also have some ongoing filing requirements, though the partnership agreement, like in general partnerships, is private and not required by law.
Limited Liability Partnership (LLP)A Limited Liability Partnership (LLP) is a business structure where all partners have limited liability, meaning they are only responsible for the business’s debts up to the amount they have invested. Each partner pays taxes on the income they earn from the profits. In an LLP, ordinary members are both owners and decision-makers, with limited liability.LLPs must also have at least two designated members, who take on additional responsibilities similar to nominated partners in general partnerships. These responsibilities include managing company accounts, registering the business with HMRC, registering for VAT if annual sales exceed £85,000, appointing auditors when necessary, filing annual accounts with Companies House, and acting on behalf of the business in case of dissolution.LLPs are required to register with Companies House, adhere to ongoing filing requirements, and keep the terms of their partnership agreements private.
Private limited company (LTD) types:- Limited by guarantee - Limited by shares
A company limited by guarantee is typically not operated for profit. It is legally distinct from those who manage it, maintains its own financial records, and reinvests any profits back into the organization. Instead of shareholders, it has members, who act as guarantors. Each member agrees to cover the company’s debts up to a predetermined amount, but there is no scenario of unlimited liability. This type of structure is commonly used by non-governmental organizations (NGOs), charities, and clubs.
A private company limited by shares has shareholders and a board of directors. The shareholders, who own the company, do not manage it directly and must elect at least one director to oversee its operations. There is no maximum limit on the number of shareholders. These companies are required to issue a statement of capital, detailing information about their shares, such as the number of shares, their total value, and the names and addresses of the shareholders. Shares in this type of company can only be traded privately and are not sold on the stock exchange.
Public limited company (PLC)A Public Limited Company (PLC) is similar to a private limited company (LTD), but a key distinction is that a PLC can sell its shares on a stock exchange. All shareholders have limited liability, meaning they are only responsible for the amount they have invested. To qualify as a PLC, the company must have a minimum issued share capital of £50,000, with at least 25% of that sold before registration. A PLC also requires a minimum of two shareholders, two directors, and a company secretary who holds an ICSA qualification.Like LTDs, PLCs must register with Companies House and are subject to paying corporation tax, unlike partnerships. PLCs are also required to hold an annual general meeting (AGM). One of the advantages of a PLC is the ability to more easily change ownership and raise capital compared to partnerships or even private limited companies.
SUMMARY
Types of companies & partnerships to be considered during registration
Partnerships: - General Partnership- Limited Partnership (LP)- Limited Liability Partnership (LLP)Private limited companies (LTD):- Limited by guarantee - Limited by shares Public limited companies (PLC)
Key Differences Between Partnerships and Limited Companies
• Liability: Except for Limited Liability Partnerships (LLPs), all partnerships have at least one partner with unlimited liability. In contrast, no type of limited company involves an owner having unlimited liability.• Shareholders: Partnerships do not issue shares; ownership rests with the partners. Limited companies, on the other hand, issue shares to shareholders. Only Public Limited Companies (PLCs) can sell shares on a stock exchange.• Directors: In all types of partnerships, the owners are the primary decision-makers and actively run the business. In limited companies, shareholders own the company but do not manage it directly, instead appointing directors to run it.• Taxation: Partnerships are not subject to corporation tax. Instead, each partner pays income tax and national insurance on their share of the profits. Limited companies, however, pay corporation tax on profits, and individuals receiving income from the company must also pay personal taxes.• Registration: All limited companies are required to register with Companies House, whereas partnerships only need to register if they are a Limited Partnership (LP) or an LLP.