LLP or partnership: choosing the best business structure

Choosing the right vehicle for a professional or owner-managed business has long-term consequences for liability, governance, tax and capital. Usually, the choice is between a traditional equity partnership or a limited liability partnership (LLP). Both can work well, but they differ in law and in practice.

This article explains the key differences, advantages and disadvantages and the points that often decide the issue.

Legal status and liability

An equity partnership under the Partnership Act 1890 doesn’t have separate legal personality. It’s a relationship between partners who carry on business together with a view of profit. Contracts are entered into by partners as agents for one another and, critically, partners are jointly (and sometimes jointly and severally) liable for firm obligations, including wrongful acts of another partner in the ordinary course of business. This liability profile is one of the biggest drawbacks.

In comparison, an LLP, created under the Limited Liability Partnerships Act 2000, is a body corporate with separate legal personality. It can own assets, enter contracts and sue or be sued in its own name. Members’ liability is generally limited to their capital commitment and agreed contractual obligations, although it doesn’t protect against personal liability for an individual’s own negligence, regulatory breaches or guarantees.

Tax treatment and remuneration

For UK tax purposes, both partnerships and LLPs are broadly tax transparent. Profits are calculated at firm level but taxed on partners or members as if they carried on the trade personally. There’s no corporation tax at entity level, with profits instead allocated for income tax. This transparency is attractive where individuals want to extract profits without a second layer of tax.

Within an LLP, the salaried members rules can deem a member to be an employee for tax if three statutory conditions are met: disguised salary, lack of significant influence and insufficient capital. Careful consideration of remuneration is required to avoid these rules. Traditional partnerships have no equivalent rules, though partners who appear to be employees may face HMRC challenge. Drawings in either model are distributions, not deductible costs, and tax timing follows profit allocation rather than cash.

Governance and control

A partnership runs on its partnership agreement. While the Partnership Act supplies default rules, most firms disapply them and use bespoke provisions on decision-making, admission and retirement, expulsion, restrictive covenants, capital and profit sharing.

An LLP operates under a members’ agreement alongside the statutory framework. This separates the entity from its owners, enabling boards and committees with reserved matters. Voting and profit mechanics are flexible in both models and can accommodate variable profit shares, performance-linked allocations and different equity classes.

Public disclosure distinguishes the two: LLPs must file annual accounts and a confirmation statement at Companies House. Partnerships have no public filing obligations beyond tax, so financials remain private. Running an LLP also brings compliance costs for accounts preparation, audits (where thresholds are met) and statutory filings. Partnerships avoid these filings but still need robust management accounts, tax returns and controls.

Risk management, regulation and insolvency

An LLP’s limited liability helps contain risk. Regulators and clients tend to focus on governance, supervision, conflicts controls, engagement terms and insurance.

LLPs follow corporate insolvency procedures (administration and liquidation). Partnerships are subject to partnership insolvency rules and partners’ personal insolvency can be engaged by firm debts. The risk of personal exposure is a common reason to prefer the LLP model.

Admission, promotion and exit

Both vehicles support progression from salaried roles to fixed share and then to full equity. LLPs often use member classes and capital tranches to structure this. Expulsion and compulsory retirement need clear contractual positions. Because an LLP is a corporate body, it can separate economic rights from managerial authority more clearly, which helps where underperformance requires decisive action.

On exit, there’s usually no external market for equity. Leavers are paid their capital and any undrawn profits under the agreement, subject to any clawbacks. Restrictive covenants remain enforceable if reasonable and should be tailored to protect goodwill while remaining proportionate.

How firms usually decide and conversions

Boards and senior management typically focus on:

• Liability protection, which tends to favour an LLP
• Confidentiality, where avoiding public filings may point to a partnership
• Appetite for corporate-style governance and clearer authority lines, which supports an LLP
• Funding and tax, which are usually neutral with careful design (subject to the LLP salaried member rules)
• Client and regulator expectations, which both structures can meet where fundamentals are sound.

Many established partnerships have converted to LLPs without disruption. With careful planning, consents and banking changes can be handled smoothly. Tax neutrality is achievable where continuity conditions are met, but early input is vital.

A balanced verdict

There’s no single right answer. For most growth-minded, externally facing firms, the LLP offers a compelling blend of limited liability, familiar market signalling and adaptable governance, at the price of added transparency and compliance.

A traditional partnership suits smaller or more private practices that prioritise confidentiality and simplicity, accept the liability profile and value the symbolism of partner-to-partner trust.

The decision should reflect risk appetite, culture, growth ambition, regulatory environment and the expectations of your employees and clients.