Limited Company or Partnership – which should you choose?

Choosing to set up as a Limited Company or Partnership could be critical to your success when setting up a business. Understanding the key differences will help you decide on the best structure for your company. If you are considering which would be best for you, here are the main differences.

There are two different types of limited companies (private limited and public limited; and three different types of partnerships (general partnership, limited partnership and limited liability partnership). All limited companies have limited liability for their shareholders, however, partnerships do not issue shares and some partnerships may be structured to have unlimited liability. The structure of ownership and management also differs. In limited companies, the shareholders own the company, but the directors are responsible for operating it. Whereas in a partnership, the partners both own and run the business.

Choosing a Partnership type

A general partnership is relatively simple to set up. It requires multiple owners to jointly own and run the business. They share the losses or profits and pay equally for the expenses. This type of partnership has unlimited liability and so the owners are responsible for the losses, and likewise the profits as individuals and therefore pay income tax and National Insurance on their share of any profits.

A limited partnership must have at least one general partner and one limited partner, each of whom will have different levels of liability and responsibilities. The key difference is that a limited partner will invest in the start-up costs and therefore is limited to the initial investment amount. The general partner will run the business but has unlimited liability. There are different tax treatments and potential VAT requirements for a limited partnership.

A limited liability partnership is used when all the partners have limited liability. A partner, in this instance, is both an owner as well as a decision maker and will pay taxes on the income they generate from their share of the profits. As with a limited partnership, they must register with Companies House and register for VAT if applicable.

Choosing a Limited company type

A private limited company is denoted by ‘LTD’ at the end of the business name. Some issue shares and some are limited by guarantee (legally separate from the people who run it and normally run as a not-for-profit). Where a private company has shareholders, it must also appoint at least one director to run the business. The shares are issued privately and can not be traded on the stock exchange.

A public limited company (PLC) is very similar to an LTD company however the shares can be sold and traded on the stock exchange. The business must also have issued shares to a value of at least £50,000, have sold at least 25% of these prior to registering as a company and have at least two shareholders and two directors. There are also tax and filing differences.

Shares in this type of business are only tradable privately and shareholders can’t sell them on the stock exchange.

For more information and advice on whether to set up a Limited Company or Partnership and ensure the right company structure for your business, contact the Commercial Law Solicitors at Hibberts.