Which makes more sense: partnership or company?
A business opportunity has arisen involving you plus at least one other party. What’s the best way to structure it?
Sometimes a single legal form stands out as making clear sense. Other times there are options.
We’ve come across a few instances recently in which the choice has boiled down to: limited liability company or limited liability partnership. So, which might make more sense, and why?
First, let’s be clear about the ‘limited liability’ part, which applies to both forms. That ensuring that the parties involved are not personally liable for the actions of the business. If the business fails, their houses are safe.
With that protection common to both forms, let’s look at the differences.
The partnership model is generally more flexible than the company model. Partners can come and go, whereas shareholders in a company tend to be more fixed.
Also, different partners can be paid in different ways, whereas shareholders have to be paid in the same way where there’s a single class of shares.
Partnerships probably seem the better bet so far. So, needless to say, they have potential downsides relative to companies.
Those downsides are mostly to do with how money is extracted and involve tax and National Insurance. Another factor is what can/cannot be treated as an expense against income.
For example, dividends are normally an efficient way of extracting money from a company, whereas partnerships do not pay dividends because there aren’t any shares to pay them on. Anything partners extract will be treated as regular income.
The result is that those using a partnership model generally find themselves paying a slightly higher effective rate of tax.
We won’t go into fine details here. Suffice to say that this is something we talk about with many of our clients. So, if it’s relevant to you, come and have that conversation with us.
Have a thirst for more knowledge in this area? Here are a couple of useful resources:
- Chapter 1 in particular of https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/541097/GPLLP1_Incorporation_and_names_v6_1-ver0.1.pdf
Lastly, if it’s good enough for Radiohead, it’s good enough for us. Check out their business empire here. Who says you can’t be talented artists and shrewd business folks.