The LLP (limited liability partnership) is a relatively recent invention, dating back only to the millennium. It's a way of structuring a company that has since proven popular with a range of sectors, including law, accountancy, medicine and architecture.

LLPs combine features of traditional limited companies with those of traditional partnerships. Like limited companies, LLPs have to be registered at Companies House.

LLPs can vary in size but need to have a bare minimum of two "designated members". There's no upper limit to the number of members.

You'll have noticed that the language used to describe LLPs is different from limited companies. We talk about "members" – not directors, shareholders or guarantors. Occasionally these members are referred to as "partners" – but in this article, we're sticking to "members".

As well as individuals, limited companies can be members of an LLP. In this context, they're referred to as "corporate members" and have different tax obligations to individuals.

The obvious question here is: what is the point of this new legal structure? And as the name suggests, it centres on the issue of liability.

How is liability different in an LLP?

Traditional partnerships have many advantages – but they have an in-built double jeopardy for partners. If the partnership goes south financially or is faced with legal action, these costs have to be underwritten by the partners.

An LLP, by contrast, splits profits among members according to its members' agreement. Each member is liable only for their share of the business. If, let's say, there are four of them, each member is responsible only for their 25%.

If things go wrong, their personal assets are protected. This is one of the key reasons why firms in many sectors opt for an LLP structure. It keeps members safe in the event of financial turmoil, lawsuits or another member's misconduct.

A very brief history of LLPs

LLPs were brought in by the Limited Liability Partnerships Act 2000, which came into force in April 2001. These fused features of partnerships and limited companies into a hybrid legal structure.

Other legal obligations of LLPs were set out in later pieces of legislation rolled out across the next two decades.

Since their introduction, LLPs have been classed as separate legal entities (much like limited companies). This gives them the power to sign leases and enter into commercial arrangements but also means they can face legal action.

How are LLPs taxed in the UK?

This is one of the defining features of an LLP as opposed to a limited company.

Unlike a limited company, an LLP doesn't have to pay corporation tax on its profits because it doesn't have any shareholders. This is seen as an advantageous saving by many. At the time of writing, corporation tax stands at 19% but is soon to go up to 25% for companies with profits of £250,000 plus.

That said, if a limited company becomes a member of an LLP, it has to pay corporation tax on its share of the profits.

Let's take an example. Segu Enterprises is an LLP consisting of three members. In one financial year, it makes £60,000 in profits before tax. Each member takes a third of the profits.

Each member has to declare this income in their self-assessment tax return to HMRC. As well as this, the LLP has to submit annual accounts to Companies House, which go on public record.

LLPs need to make sure they submit these annual records on time. If they don't, they're automatically slapped with a fine.

What are the advantages of an LLP over other types of companies?

Although LLPs are popular in some sectors, limited companies are still prevalent. This raises the question of why you would choose an LLP over a partnership or limited company.

First, an LLP protects its members from each other. Let's say that one member is sued for negligence or misconduct – the legal costs incurred are footed only by the member in question.

Secondly, LLPs make it easy to add or remove members compared to limited companies, where shareholders can be hard to dislodge. To achieve this, LLPs don't have to sell shares but can simply amend the members' agreement. This flexibility can be attractive.

Next, LLP members aren't liable to pay tax on BIK (benefits in kind). This means that they can buy a company car or other benefit and not be taxed for it.

Finally, there's the question of privacy. A limited company's articles of association are on public record at Companies House. Anyone who cares to look can see how shares have been split.

By contrast, LLPs record their profit splits in their members' agreement – and this is a private document that isn't filed at Companies House. The only information on public display is the LLP's overall profits, a list of PSCs (people with significant control) and a registered address.

This relates to a disadvantage of LLPs. In the old days, residential addresses were recorded at Companies House. This is no longer the case, but if your residential address was recorded before the changes were made, you have to pay to have the information suppressed. This could be a problem if your work involves sensitive cases.

Is an LLP right for you?

There's no one-size-fits-all answer to this question. It depends on your specific needs and goals and to what degree an LLP's tax arrangements will benefit you.

LLPs have certainly proven popular in sectors which historically tended towards partnerships – doctors, for instance, and solicitors.

Whatever route you go down, it can be advisable to take legal and accounting advice before making a decision. That way, you can make sure that your interests are protected.

At Milners Law, we can help sole traders, partnerships, limited companies and LLPs from a wide variety of sectors. Whatever your requirements, we offer straight-talking commercial legal advice that's 100% focused on your needs and objectives. If you're interested in our services, please don't hesitate to contact us for a free, no-obligation consultation.