The differences between a Limited Liability Partnership and a Limited Partnership
There are a multitude of offshore products and jurisdiction all offering a dizzying array of possibilities and locations with a wide range of products and characteristics.
While many company formation vehicles often appear similar each have their own unique attributes that can support the proper growth and protection of a business depending upon its specific needs and circumstances.
Within Europe, the United Kingdom (UK), remains the most sought after jurisdiction due to its location, opportunity and reputation.
The UK offers several company formation vehicles: the UK Limited Liability Partnership (LLP) and the Scottish Limited Partnership (SLP) are two such options that give clients a wide range of possibilities.
A Limited Liability Partnership (LLP) and a Limited Partnership (LP), upon first glance, appear to be similar, yet they each have their distinct differences.
This article will make clear what some of the fundamental differences are between an LLP and an LP, using the UK and Scotland as a case study.
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Limited Partnerships (LP) gained popularity in the UK during the 1970s and 80s and are traditionally used for projects or ventures that have a finite life period; such as events or one-off business ventures.
An SLP has its origins back over a hundred years ago in the Partnerships Act of 1890, which was later formed into the Limited Partnerships Act of 1907.
Limited Liability Partnerships (LLP) on the other hand, became popular in the 1990s and were, and still are often used by many small and medium-sized business owners.
The UK LLP has a more recent history, having come to fruition through the passing of the Limited Liability Act 2000.
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A UK LLP and a SLP share many common features including tax transparency, a separate legal personality, and flexibility.
Both structures benefit from having limited liability for all ‘limited partners’ associated with the business, making them free from personal risk – that is, if they are not associated with the management of the company.
For tax purposes, both entities are seen as being ‘transparent’, therefore making all partners associated with the business free from corporate taxation – though each partner is required to declare profits earned and pay tax in his/her own country of residence.
And lastly, both vehicles are flexible in their organizational structure in which management, responsibilities and profit distribution can be tailor-made, outlined in a partnership agreement form.
Though a UK LLP and a SLP have many common features, the main differences lie in its structure and liability.
In a LP there are two types of partners - a general partner and a limited partner, whereas in a LLP all members are considered to be limited partners.
A general partner is the one who takes on management responsibilities of the LP, and therefore they become personally liable for the debts and expenses of the business.
Whereas a limited partner is one whose contribution to the business is in capital and is not involved in the running of the business, which limits the liability to the amount contributed to the partnership and is furthermore protected from being held personally liable from any debts taken on from the LP.
Limited partners have no voting power and can lose their status and are held personally liable if they are found to be actively involved in the running of the business.
The profits of a LP are distributed to the limited partners much like a shareholder receives dividends for their financial contribution, which are normally distributed after the general partners receive their share.
In a LLP all partners benefits from limited liability and are also allowed to be involved in the management of the business – however, liability ultimately rests upon the partner responsible for the debt. And unlike LP’s, profits are usually distributed equally, or between partners based upon their ownership interest, unless otherwise agreed upon in a partnership agreement.
While LP’s can be used for virtually any type of business, LLP’s generally have a few more limitations as to what type of business or services they provide.
Limited Liability Partnerships are often used for professional services, such as law and accounting firms for instance, where partners are protected from the negligence of other partners in the firm.
Limited Partnerships as mentioned before are used primarily for limited life span enterprises or projects and have the added flexibility of being able to have a general partner be a Limited Liability Company (LLC) or a Private Limited Company (PLC), thus giving the general partner an added layer of protection and anonymity.
An SLP has a unique advantage of being able to hold real estate property and is often used as a holding company of physical or non-physical assets, or as a facilitator of multiple ‘passive’ limited investors.
As an SLP’s management is usually within the hands of one general partner it allows for an efficient and highly centralized form of management that give an individual complete control over his/her own enterprise.
Whether it’s an LLC or an LP, in the UK or elsewhere in the world, choosing the right offshore vehicle and jurisdiction is all based upon your unique circumstances and needs.
Each product and location has its own advantages that may or many not benefit you and your business. For any questions concerning the UK LLP, SLP or any other of our offshore formation products please do not hesitate to contact us.
If you are interested in a Scottish LP of a UK LLP or would like more information please see the below links:
Disclaimer: Offshore Protection strives to keep information on this website updated, however, laws and circumstances are subject to change. All information on this website is for reference purposes only and does not constitute legal or tax advice. Contact Offshore Protection for specific advice regarding your situation.