LLP or Ltd ? This is the question!

Should a Business Angel look to invest in a LLP (Limited Liability Partnership) or a Limited Company?

Often, entrepreneurs will have both LLPs and LTDs for their different businesses.

To answer the question of which is better we need to ask:

Will the business use the profits (in the main) to reinvest? Say, build a franchise business? If so, keep the profits inside the business and re-use them before paying out and paying tax – so use an LTD company.

Or will the business pay out all (or nearly all) profits as ‘earnings’ then choose LLP – as you can offset the cost of cars (which you can’t for an ltd).

So, the answer depends on the business goal. And the tax and legal issue is simply which structure helps you achieve your goal best?

Given that many Business Angels are looking for a sale of the business, and entrepreneurs are not forecasting immediate profits, the entrepreneur will set up a Limited Company, as this allows the reinvestment of any earnings. 

Equally, the standard company law that surrounds the treatment of shareholders and directors is more clearly established for LTDs than shares of Limited Liability Partnerships.  Hence, for larger investments, investors would most likely prefer the cleaner structure of the LTD.

However, not all Business Angels are looking for sales in the short term, and a number of new Business Angels may be willing to accept a mixed portfolio of investments – some of which will seek a sale in the short term, and some of which will seek to pay cash to partners early on.

In the case where the business requires capital assets, it might make sense to have both! Here the ‘operating’ company can lease the assets from the ‘investment’ company. This kind of thinking applies to a manufacturing or tech company – one that buys capital assets – but not a web based or service business.

But decide the business and investment goal first – then the tax and legal structure.

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