Most people choosing a business structure compare sole trader against limited company. Where two or more people are going into business together, particularly in a professional practice, there is a third option that is frequently the better fit, and frequently misunderstood.
What an LLP actually is
A limited liability partnership is a body corporate: it has its own legal personality, it can own assets and contract in its own name, and its members' liability is limited. In those respects it behaves like a company. For tax, though, it is normally transparent, treated much like an ordinary partnership.
The tax difference, which is the whole decision
In an LLP, profits are not taxed on the LLP. They are allocated to members, who each pay income tax and National Insurance on their share as self-employed individuals, whether or not the money is actually drawn. Profit left in the business to fund growth is still taxed on the members personally that year.
In a limited company, profits are taxed on the company at corporation tax rates. Money only becomes personally taxable when it is extracted, as salary or dividends. Retained profit sits inside the company taxed once, at corporation tax rates.
That single distinction drives most of the answer.
When the LLP wins
- Profits are drawn out each year anyway. If everything is distributed, the company's deferral advantage is worth little, and the LLP avoids the second layer of dividend tax, now 10.75% and 35.75% after the April 2026 increase.
- Flexible profit sharing. An LLP agreement can allocate profits in whatever proportions the members agree, and vary them year to year, without issuing share classes or worrying about the settlements rules that constrain family shareholdings in a company.
- Professional practices. Firms of solicitors, surveyors, consultants and accountants often suit the LLP model, partners expect to be taxed on their share and to draw it.
- No benefit-in-kind regime for members, which simplifies cars and expenses considerably.
When the limited company wins
- You want to retain profits. Reinvesting in stock, equipment or hiring is far cheaper inside a company.
- You want investment. SEIS and EIS relief is not available for an LLP, and most investors expect shares.
- You want to incentivise a team. EMI share options need share capital.
- You are planning a sale. Selling shares is cleaner than unwinding a membership interest, and shapes the Business Asset Disposal Relief position.
- Extraction flexibility. A company lets you choose the timing and mix, salary, dividend, pension, as set out in our guide to profit extraction.
Two rules to know before choosing an LLP
Salaried members. Anti-avoidance rules can treat a member as an employee for tax, with PAYE and employer NIC, where broadly all three of these apply: their reward is largely fixed rather than profit-dependent, they have no significant influence over the LLP's affairs, and their capital contribution is small relative to their reward. Junior "partners" given a title but a fixed salary and no capital are the target. Failing these tests is expensive and it is assessed member by member.
Filing. An LLP is not private. It files accounts and a confirmation statement at Companies House like a company, so the "partnerships keep their numbers private" assumption is wrong. It also files a partnership return (SA800), and each member files their own Self Assessment.
Making the choice
Ask one question first: will profits mostly be drawn, or mostly retained? Drawn points to an LLP; retained points to a company. Then layer on investment plans, share incentives and exit intentions, which almost always push towards a company.
It is not irreversible, but changing later has tax consequences, so it is worth an hour of modelling now. We advise on structure at formation and on incorporating existing partnerships through our company formations and tax planning services. Talk it through with us before you register anything.