What is a limited liability partnership (LLP) for tradespeople?
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Limited liability partnerships (LLPs) are a useful way for two tradespeople to join forces. In this guide, we look at what LLPs are, how they work and why one might be suitable for you...
What is an LLP?
A limited liability partnership is a business with at least two designated members.
In most cases, an LLP is between two people, but it can be a company and an individual joining together.
As a partnership, each member is responsible for paying taxes on their share of the profits (and any other personal taxes they need to pay).
If the business runs up debts, then the individual members aren’t personally responsible for the debts. Hence the name, limited liability.
How to set up an LLP
Setting up an LLP is a straightforward process. You need to:
- Choose a name - You can choose any name you like, but it must end in LLP. Use the Companies House name search tool to find a unique name that hasn’t been used before.
- Have a single registered address - This can be a home address or shared premises. The address will be publicly available.
- Have at least two designated members - LLP members can be two individuals who agree to work together, or an individual and a company.
- Create a LLP agreement - This details how the partnership is structured and how it will be run.
- Register the LLP with Companies House - This formalises the agreement and will make the partnership legally binding.
Once you’ve done all this, your partnership has been established in the eyes of the law.
You can find a full list of rules and regulations about setting up an LLP here on the Government website.
Formal v informal partnership
A limited liability partnership is a legal relationship between two people (or parties). A general or informal partnership is an agreement between two people to work together.
An LLP partnership involves some paperwork and legal documentation, whereas you can make an informal alliance with a handshake. You don’t even need a contract.
The main difference is around dispute resolution. If you run into trouble in an LLP partnership, your roles and responsibilities are clear.
Disputes in informal partnerships, where no contract exists or has ever been signed, can be much more complicated to manage.
If you decide that an informal partnership is right for you, you may want to consider taking similar steps as if it were going to be an LLP. These might include:
- Using written contracts
- Having a shared business bank account
- Outlining in writing each other’s roles and responsibilities
- Mediation steps should the partnership breakdown
Whatever type of partnership you decide works for you we recommend getting something down in writing that you can both sign.
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Benefits of a partnership
- You may already have a partner you work with and want to formalise the agreement or are working together for the first time; either way an LLP is a formal and legally binding agreement that provides a solid basis for growth.
- By pooling resources as partners, you can reduce overheads and ongoing costs. You’ll find insurance, accountancy, and office costs are all lower when shared between two.
- As well as expenses, you share the management of the partnership and its future direction. In business, two heads are (almost) always better than one.
- Working with a partner adds security for those who work with you and can add scalability. This may mean you’re able to bid for and win larger pieces of work, which can help your business grow.
- If the partnership fails, or you run into financial trouble, your assets remain protected.
- If you have complementary skills or trades when put together you might be able to branch out into new lines of work or projects.
Downsides of a partnership
- As an LLP partner, you’re stuck with another person through good times and bad times. When business is good, you can share the load, but when it’s bad, you’ll have to share the profits – which can mean less profit and less pay.
- Compared to working as a sole trader, there’s more paperwork and higher running costs, such as accountancy fees, that can eat into profits.
- If the partnership fails for any reason, there are legal hoops you have to jump through to terminate it. While it’s not impossible, it can take time and cost money.
- Working with a partner requires clear communication and a shared vision of the future for the business and its growth. You’ll need to ensure that you and your partners both have the same plans for your business, or things can quickly get messy.
Like any relationship, partnerships can be complicated and occasionally messy - but when they work, they can transform how you operate for the better.