When it comes to deciding what form of business you should register – an LLP or an LTD – you should consider a lot of different parameters in order to make the right decision. I will state some general points that you should take under consideration; some of the most common parameters that I come across when I discuss with my customers about taxation structuring and company formation.
First of all, what will the nature of your business be?
Which will your field of action be?
Will it be a trading company, a service/-s providing company, a combination of both, or a manufacturing company?
LLPs are mostly used as service providing companies, as this type of company came up to facilitate the needs of professionals like consultants, advisors, accountants, lawyers, etc. and not trading companies.
Then, you have to consider how many shareholders/partners there will be.
Do you want to have the ability to sell shares of your company or welcome new partners?
Do you want to receive capital loans?
Do you want to receive investment loans?
It is very important to make clear in your mind the overall plan of your business, because it will define your business’ structure.
The next thing you have to take under consideration is where will your company sell its products or services.
Are they going be sold locally, in certain countries, or internationally?
For example: simply inside the EU, or Internationally except Middle East, or in the USA except Massachusetts and Ohio.
Or you might have a plan like this: the 1st year I want to sell in the United Kingdom, Ireland, France, Belgium and the Netherlands, and then I want to expand my sales in the USA and
Singapore. It is totally up to you in which countries you are going to sell your products and/or services. Either way you have to be sure that there are no legal or governmental walls that you will face. E.g. pharmaceutical companies have to get approval in the countries they sell their products before they do so. Thus, your overall plan plays a very significant role in your company’s structure from day one.
Then, you should consider if you would like to have a flexible internal structure, meaning if you want to be able to change things like the distribution of profits or rights or duties of individuals inside your company easily. If you want to change the internal operations of your business easily, then you should choose the LLP option, because it is harder to change the directives of an LTD – especially if you have other partners.
One more parameter that you should think about is if you want your
business to be tax efficient. By this I mean if you want to keep profits in the company in order to reinvest them. With an LTD company you can do that easily, but with an LLP you cannot. So, if you want to reinvest some or all of your business’ profits, then you should go with an LTD.
The last and most important question is how would you like to be taxed. I am pretty sure that your reply to my question would be the less the better. However, when you plan your business’ future you should pay attention to the parameters mentioned above, and this is the reason why I left this particular parameter at the end.
So, an LLP is not being taxed on corporate level because it is a partnership and not a corporation, and each partner is being taxed for his/her own income from the company, meaning that each partner is being taxed on a personal level and also pays Class 2 and Class 4 National Insurance.
An LTD company is being taxed on a corporate level and it pays Corporate Tax of 20% while its shareholders pay tax on the dividends they receive. An LTD is obliged to pay National Insurance only to its employees and to the Director/s, if they receive a salary for the work they provide.
Your company, or partnership will be your vehicle to success, so don’t waste anymore time!
I want to make clear that the above parameters are just a few of the total that we discuss with our customers before we offer them the best solution. So, it is better not to make your decision based only on the above options.