Back to Basics | UK limited liability partnerships
Summary and Implications
This Back to Basics follows our key concepts briefings, which intend to provide high-level insights regarding funds fundamentals, fund vehicles and operational considerations in a number of jurisdictions.
We frequently see UK limited liability partnerships (“LLPs”) as a popular vehicle choice for UK joint ventures, private funds and investment vehicles. This briefing looks at :
- the LLP’s core appeal such as its legal form structure, flexibility, tax profile and the limited liability protection afforded to its members; and
- some of the popular uses for an LLP together with their requirements and how they differ from a limited partnership.
Please also refer to the CMS Funds Group webpage for other briefings, including for other popular investment vehicles: Popular investment vehicles | CMS Expert Guide.
What is a limited liability partnership?
An LLP combines elements of a partnership and a company. Although there are similarities with a partnership and a limited partnership, such as flexibility and, to some extent, tax treatment, an LLP is not a type of partnership but a form of legal entity. It is fundamentally different, despite its name.
For further information on limited partnerships, please see our separate briefing: UK limited partnerships | CMS Funds Group.
An LLP has separate legal personality and, subject to its limited liability partnership agreement, unlimited capacity. An LLP is the entity that is liable to third parties and affords its members limited liability.
As a separate legal entity, the LLP owns the assets of the business and is liable for its own debts. It can enter into contracts in its own name and can sue and be sued by contractual counterparties. An LLP can be an employer, it can open bank accounts, borrow money, issue debentures and it can create fixed and floating charges over its assets.
An LLP will typically be governed by the terms of a written limited liability partnership agreement (“LLPA”). If no LLPA is entered into, the default provisions of the Limited Liability Partnerships Regulations 2001 (“2001 Regulations”) will apply. There is no requirement to file the LLPA at Companies House and it does not need to be made public.
Members, designated members and management
An LLP must have at least two members on incorporation and the LLP must be incorporated for the purpose of carrying on a lawful business with a view to profit.
The members of an LLP have limited liability and are only liable up to the amount of their capital contributions. If subsequently the LLP’s membership falls to one, that member will lose the benefit of limited liability after six months but the LLP will continue to exist.
The members own and manage the partnership but do not own the LLP’s property. The members can act on the LLP’s behalf although often LLPs appoint a management board and delegate responsibility to it.
At least two members must be nominated as “designated members” and they have certain administrative duties set out in the Limited Liability Partnership Act 2000 (the “LLP Act 2000”).
Filings
An LLP has no existence until it is actually incorporated and incorporation is effected by registration at Companies House.
Publicity is a disadvantage compared to a general or limited partnership as, subject to certain exceptions, annual accounts are required to be filed with Companies House although the amount of information required depends on the size and type of LLP.
There are other ongoing filing requirements, such as an annual confirmation statement confirming that the LLP’s future activities are lawful. An LLP must also notify Companies House of any changes in respect of members, Persons with Significant Control (“PSCs”), accounting reference date, registered office, etc.
For further information on the UK PSC Regime, please see our separate briefing: UK PSC Regime | Back to Basics Briefings | CMS Funds.
Under the Economic Crime and Corporate Transparency Act 2023 LLP members that are individuals, and a director (or equivalent) of any corporate member, will need to have their identify verified. Identity verification of PSCs will also be required. These requirements are expected to come into force on a voluntary basis in the Spring of 2025 and on a mandatory basis starting from Autumn 2025.
Legal framework
LLPs are governed by a combination of the LLP Act 2000, the 2001 Regulations, the Limited Liability Partnerships (Scotland) Regulations 2001, and the Limited Liability Partnerships (Application of Companies Act) Regulations 2009 (as amended) together (where applicable) with the written LLPA of the LLP.
Tax issues
For most UK direct tax circumstances, an LLP offers tax transparency. Each member is taxed on its share of the income and expenses of the LLP (regardless of whether these amounts have been distributed to members).
Tax transparency can be switched off if the LLP fails to carry on a business with a view to profit or when an LLP is in liquidation or is being wound up by an order of the court.
LLPs may not be suitable for certain types of investor. For example, pension funds and the pension business of a life insurance company cannot benefit from the usual tax exemption on investment income and gains, where such income and gains are paid to the pension fund or pension business as a member in a property investment LLP. Property investment LLPs are LLPs whose business is wholly or mainly in investments in land, and which derive the principal part of its income from investments in land.
LLPs may not be taxed as a partnership in some overseas jurisdictions, meaning that specialist tax advice should be sought wherever members are resident outside the UK.
Tax consequences for any outgoing members must be considered, particularly capital gains tax and any stamp duty land tax chargeable on their share of the market value of the underlying real estate assets or marketable securities of the LLP.
An LLP is capable of forming a VAT group with any subsidiaries it controls and, in such cases, will be the registrable entity for VAT purposes.
There are two particular sets of anti-avoidance legislation relating to LLPs, which were introduced to ensure that:
- members of LLPs who in practice are treated more like employees are subject to the same tax treatment as employees (the ‘salaried member rules’); and
- LLPs are prevented from allocating profits to corporate members and losses to individual members in a way that takes advantage of the lower rates of tax on corporate members (the ‘mixed member rules’).
These rules should be considered when structuring or investing in an LLP and should be monitored continually during its lifetime.
Regulatory issues
An LLP can be a collective investment scheme (“CIS”) under the Financial Services and Markets Act 2000 (as amended) where some members do not have day-to-day control over management of the LLP’s assets. Where an LLP is classified as a CIS, it will (unless it is regulated as an AIF) need to be or appoint an FCA-authorised operator, which may add to the cost of using this vehicle. No regulated activity (including its establishment, operation and winding up) may be undertaken in respect of an LLP which is a CIS unless undertaken by the authorised operator.
Differences between Limited Partnerships and LLPs
| LLPs | Limited Partnerships | |
|---|---|---|
| Legal Personality | Yes - it is defined as a “body corporate(with legal personality separate from its members)” (s.1, LLP Act 2000). | No, unless registered in Scotland. |
| Structure | Members own and manage the LLP (unless they delegate), but do not own its property. At least two members must be nominated as “designated members”. This includes certain administrative responsibilities. | Partners have partnership interests and ownership of assets as partnership property. Management is by the general partner(s). Limited partners must not “take part in the management of the partnership business”, and if they do so they lose the benefit of limited liability. |
| Limited Liability | Members have limited liability. | Limited partners have limited liability; general partners have unlimited liability. |
| Transparency of Ownership | PSCs must be recorded in the LLP’s PSC register and notified to Companies House. | English limited partnerships do not keep a PSC register. Scottish limited partnerships must keep PSC register and can be relevant legal entities (“RLEs”). The general partner (not limited partners) may be identified as a PSC (if individual) or RLEs in relation to an underlying company or LLP. |
| Accounts | Required, with information depending on size and type of LLP. | Required if all of the partners are limited companies. |
| Ability of members to extract money | Generally, there is full flexibility to distribute any funds or assets of the LLP (both capital and profits) to members. | Generally, profits can be distributed to limited partners but restrictions on distributing capital apply if not a “private fund limited partnership”. |
| Tax treatment | Treated as tax transparent in most circumstances – each member is taxed on its pro rata share of the income and expenses of the LLP (regardless of whether these amounts have been distributed to members). Tax transparency can be switched off as above. | Treated as tax transparent – each partner is taxed on its pro rata share of the income and expenses of the limited partnership (regardless of whether these amounts have been distributed to partners). |
LLP Uses
An LLP offers a combination of limited liability, operational flexibility, tax efficiency, regulatory compliance, ease of formation, and attractiveness to investors and managers. For these reasons we frequently see LLPs used in a funds’ context – an LLP is often used as a general partner vehicle or as a vehicle for management incentive arrangements, such as carried interest and general partner (“GP”) co-investments (although outside the scope of this back to basics we note the tax treatment of carried interest is currently subject to HMRC review).
LLPs are also used in professional partnerships where many individuals are involved in a business, such as law firms or accountant firms and can also be the vehicle where public sector bodies are involved.
1. Sponsors and Management Incentive Arrangements
An LLP provides a flexible framework for structuring management incentive arrangements, particularly around carried interest, GP co-investment and management/advisory fees. The LLPA can be tailored for the roles, responsibilities, profit-sharing arrangements, governance, vesting and good leaver and bad leaver terms. This level of flexibility is particularly beneficial where each member might contribute different amounts of capital, expertise, or time to the business. For example, “Key Persons” may receive a greater share of any carried interest given their integral role to the fund.
Profits received by the LLP are generally taxed in the hands of the management team. Since LLPs are tax-transparent entities, profits (i.e. carried interest and co-investment returns) received by the LLP allocated to members from the underlying investment fund are taxed directly as income or capital gains depending on their individual circumstances. This typically results in a lower effective tax rate than if the profits were received by a UK limited company, which would be subject to corporation tax and then potentially to income tax when distributed.
2. LLPs as General Partners of Limited Partnerships
An LLP is also a popular choice as a GP in UK limited partnerships, which are commonly used as the structure for private investment funds. The main advantages of include:
- Limited Liability Protection: By using an LLP as the GP, the general partner avoids the risk of personal liability for its members beyond the amount of their investment (which might be nominal).
- Compliance: A UK limited partnership with a GP which is an LLP (rather than a company) is not considered a ‘qualifying limited partnership’ under the UK Partnership Accounts Regulations. This is beneficial because it means the limited partnership is not subject to the legal requirement to file audited accounts. As a result, the compliance burden for the limited partnership is lighter.
3. Joint Ventures
LLPs are also used as vehicles for joint ventures, with each party contributing and having different interests and responsibilities in the venture. It is possible to structure the LLPA such that the members have day-to-day control over the management of the business thereby reducing the administrative burden of appointing an authorised manager or operator.
Conclusion
LLPs remain a popular vehicle choice for UK joint ventures, private funds and investment vehicles.
If you would like to discuss LLP vehicles and their use in joint ventures, funds or other investment structures, please contact a member of the CMS UK Funds Group.
The information contained in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice.
