Limited companies are owned by one ore more shareholders, whereas Limited Liability Partnerships (LLPs) are jointly owned and run by two or more members (partners). To understand the differences between a company shareholder and an LLP member, 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 that are legal entities in their own right. They must be registered at 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 that combines some of the aspects of traditional partnerships with those of limited companies. An LLP is also incorporated with its own legal personality and must be registered at Companies House. LLPs are owned and managed by their members.
Are there any similarities between a shareholder and an LLP member?
An LLP member and a company shareholder are both protected by limited liability. This means that, generally, they are not personally liable for the debts of the business. Another confusing similarity is that shareholders are often referred to as members.
What are the differences between a company shareholder and an LLP member?
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 are subject to dividend tax, whereas non-dividend income is subject to Income Tax.
By default, LLP profits are distributed equally amongst the members. In practice, distributions of profits are normally documented in a Members’ Agreement (also known as an LLP Agreement). Each LLP member is required to pay Income Tax on the profits they receive.
Management vs ownership
Shareholders can take part in the management of their company (e.g. in the case of voting rights at general meetings), but 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 are subject to the rules set out in the LLP Agreement, and 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
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.
Whilst LLP members 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 LLP accounts to Companies House).