A limited liability partnership (LLP) is a body corporate with its own legal personality, formed under the Limited Liability Partnerships Act 2000 by two or more persons carrying on a lawful business with a view to profit. Its members are not personally liable for debts the LLP cannot pay, yet for income tax and corporation tax the LLP is normally transparent: each member is taxed on their own share of the profits, as a partner would be.

What is an LLP, and how is it different from an ordinary partnership?

Section 1(2) of the Limited Liability Partnerships Act 2000 makes an LLP a body corporate with legal personality separate from its members, and section 1(3) gives it unlimited capacity. Section 1(5) says the law relating to partnerships does not apply to an LLP unless the Act or another enactment provides otherwise. That is the key contrast with a general partnership, where section 9 of the Partnership Act 1890 makes every partner liable jointly with the other partners for all debts and obligations of the firm incurred while they are a partner.

Members can be individuals or companies; Companies House calls a company that is a member a corporate member. Under section 6(1) every member is an agent of the LLP, so a member can bind it in dealings with outsiders. The LLP is not bound where the member had no authority and the other party knew that, or did not know or believe the person was a member (section 6(2)). Section 6(4) makes the LLP liable to the same extent as a member who is personally liable to an outsider for a wrongful act or omission in the course of the business. Limited liability therefore protects members from the LLP’s own debts; it is not a shield for a member’s personal wrongdoing.

How do you set up an LLP?

Under section 2(1)(a) of the 2000 Act, two or more persons associated for carrying on a lawful business with a view to profit must subscribe their names to an incorporation document. The document must give the name, the part of the UK where the registered office is situated and an appropriate address, an appropriate registered email address, details of each member including a statement that each individual’s identity has been verified, which members are designated members (or that every member is), and a statement of initial significant control. A false statement about the two person requirement is a criminal offence under section 2(3).

The name must end with “Limited Liability Partnership” or “LLP” (or the Welsh equivalents for an LLP registered in Wales). Companies House currently charges £100 to register an LLP using software, £156 for the same day service and £124 on paper.

What do designated members have to do?

An LLP must have at least two designated members at all times. Section 8(2) of the Act provides that if there would otherwise be no designated members, or only one, every member is a designated member. The incorporation document, or a later notice to the registrar, can also say that every member from time to time is designated (section 8(3) and (4)).

Companies House guidance lists what designated members must do:

  • register the LLP for Self Assessment with HMRC (and register separately as individuals);
  • register for VAT if sales are expected to exceed £90,000 a year;
  • appoint an auditor if one is needed;
  • keep accounting records, and prepare, sign and deliver annual accounts to Companies House;
  • deliver the confirmation statement and report changes to members, the registered office, the name and people with significant control;
  • act for the LLP if it is wound up and dissolved.

LLP accounts follow the same timetable as a private company: after the first period, they are due 9 months after the end of the accounting reference period. Late filing penalties start at £150 for accounts up to one month late and rise to £1,500 for more than six months late. Designated members are personally responsible for delivery and can be prosecuted for failing to file.

What happens if there is no LLP agreement?

Section 5(1) of the Act says the members’ mutual rights and duties are governed by agreement between them or, where the agreement is silent, by default rules in regulations. Those rules are in regulation 7 of the Limited Liability Partnerships Regulations 2001 (SI 2001/1090). Among them:

  • all members share equally in the capital and profits;
  • every member may take part in management;
  • no member is entitled to remuneration for acting in the business;
  • no new member may be introduced without the consent of all existing members;
  • ordinary business questions can be decided by a majority, but the nature of the business cannot change without everyone’s consent.

Regulation 8 adds that no majority can expel a member unless an express agreement gives that power. Without an agreement, a member can leave by giving reasonable notice (section 4(3) of the Act). Equal shares and no power to expel are rarely what founders intend, so a written agreement is essential.

How are LLP profits taxed?

Section 863(1) of the Income Tax (Trading and Other Income) Act 2005 provides that where an LLP carries on a trade, profession or business with a view to profit, its activities are treated as carried on in partnership by its members, and its property is treated as held by them as partnership property. Section 1273 of the Corporation Tax Act 2009 has the same effect for corporation tax, which is how a corporate member is taxed on its share. The LLP itself does not pay income tax or corporation tax on its trading profit.

Every member must register for Self Assessment, and a partnership return is made for the LLP showing each member’s share. Individual members are taxed as self employed partners on their allocated profit, so self employed National Insurance and the tax year basis apply in the normal way. Transparency continues through a temporary cessation and through a genuine winding up that is not unreasonably prolonged or carried out for tax avoidance, but it ends when a liquidator is appointed or a winding up order is made, whichever is earlier (section 863(3) and (4)).

For the choice between an LLP, a company and trading alone, see sole trader vs limited company.

When is an LLP member taxed as an employee?

The salaried member rules in sections 863A to 863G of ITTOIA 2005, inserted by the Finance Act 2014, treat an individual member as an employee where all three conditions are met:

  1. Condition A (section 863B): it is reasonable to expect that at least 80% of the amounts payable for the member’s services will be disguised salary, meaning amounts that are fixed, or vary without reference to the LLP’s overall profits or losses, or are not in practice affected by them.
  2. Condition B (section 863C): the members’ mutual rights and duties do not give the member significant influence over the affairs of the LLP.
  3. Condition C (section 863D): the member’s contribution to the LLP is less than 25% of the disguised salary expected for the tax year.

Failing any one condition takes the member outside the rules. HMRC’s Partnership Manual (PM259100) explains that a targeted anti avoidance rule in section 863G ignores arrangements whose main purpose is to stop someone being a salaried member, so that people whose terms are like employees pay tax and National Insurance as employees.

Illustration only. A member is paid a fixed £80,000 a year plus a £5,000 share that depends on the LLP’s profits, and has no real say in how the LLP is run. About 94% of the reward is disguised salary, so Condition A is met, and Condition B is met. Condition C turns on capital: 25% of £80,000 is £20,000. With £10,000 of capital the member is a salaried member and the LLP operates PAYE on the pay. If the member contributes £20,000 or more, Condition C fails and the member is taxed as self employed.

What happens when an LLP fails or closes?

Section 1(4) of the 2000 Act requires members to contribute to the LLP’s assets on a winding up only to the extent the Act provides. One important provision is section 214A of the Insolvency Act 1986, which applies only to LLPs and is inserted by Schedule 3 to the 2001 Regulations. A liquidator can ask the court to order a member to repay withdrawals (profit shares, salary, loan repayments or interest) made in the two years before the winding up began, if the member knew or had reasonable grounds to believe the LLP could not pay its debts or would become unable to do so as a result. The amount cannot exceed the withdrawals in that period. This works alongside the wrongful trading rules.

A solvent LLP that has stopped trading can apply to be struck off on form LL DS01, the LLP version of the DS01 strike off process.

What mistakes do LLPs commonly make?

  • Paying members a fixed “salary” without checking the salaried member conditions, then finding PAYE and employer National Insurance were due.
  • Relying on the default rules by accident, so profits are shared equally and no one can be expelled.
  • Allowing the number of designated members to fall below two, which makes every member designated and responsible for filings.
  • Drawing profits while the LLP is in financial difficulty, which can be clawed back under section 214A.
  • Forgetting that people with significant control and member changes must be reported to Companies House.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.