Limited companies are owned by shareholders, whereas Limited Liability Partnerships (LLPs) are jointly owned and run by their members.
To understand the differences between shareholders and members, we should first briefly consider how a limited company differs from an LLP.
What is the difference between a limited company and an LLP?
Limited companies are incorporated businesses – considered to be legal entities in their own right – which must be registered with Companies House. They are owned by shareholders and managed by directors, but this distinction between ownership and management can become diluted if directors also hold shares in the company (as is normally the case with SMEs).
A Limited Liability Partnership (LLP) is a business structure which combines some of the aspects of partnerships with those of limited companies. It is also incorporated with its own legal personality and must therefore also be registered with Companies House.
LLPs are both owned and managed by their members (also known as partners) – so there is no distinction as between directors and shareholders.
Are there any similarities between shareholders and LLP members?
Both LLP members and shareholders of limited companies are protected by limited liability; generally they are not personally liable for the debts of their business.
Another confusing similarity is that shareholders are often referred to as members.
What are the differences between company shareholders and LLP members?
Payment and tax
Shareholders – receive a share of company profits (in proportion to the number of shares owned) in the form of dividend payments. Dividend payments have different levels of taxation compared to non-dividend income.
LLP members – by default, profits are distributed equally amongst the members. But in practice, distributions of profits are normally documented in a Members’ Agreement (also known as an LLP Agreement). Members must pay tax on any profits received using the normal income tax rules.
Management vs ownership
Shareholders – although shareholders can take part in the management of their company (e.g. in the case of voting rights at AGMs), they have no automatic right to do so. In other words, there is an inherent distinction between the management and ownership of a limited company (although directors are often also majority shareholders in smaller companies).
LLP Members – subject to the rules contained within an LLP Agreement, all members have a right to take part in the management of the LLP. In practice, certain members will often be more senior, or take a more active role in managing the business.
Risk and responsibility
Shareholders – aside from the value of their shareholdings, which can be lost in the case of company insolvency, shareholders (assuming they are not also directors) generally do not carry any liability in respect of the debts, actions or omissions of the company. For example, if a director has acted fraudulently or mismanaged company funds, this will not be the responsibility of shareholders.
LLP Members – although members in LLPs enjoy limited liability in respect of debts arising from insolvency, they can potentially be sued alongside the LLP if they have been negligent or allowed wrongful or fraudulent trading.
Furthermore, there must at all times be two ‘designated’ members who have extra legal responsibilities (e.g. submitting annual accounts to Companies House).