Partnership vs. limited company: definitions and differences
By Indeed Editorial Team
Published 26 April 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
There are many different types of business structures, each with its own advantages and disadvantages. Among these include limited companies and partnerships, together with their respective sub-categories. If you work in business development or are thinking of starting your own business, understanding the differences between the two can be useful. In this article, we compare a partnership vs. a limited company, explain the different types of each business structure, outline the key differences and answer some frequently asked questions.
Partnership vs. limited company
Understanding the differences between a partnership vs. a limited company is useful if you're thinking of starting your own business or if you're interested in business development. These are two common types of business structure with a third being a sole trader. Among the primary differences are that all limited company types have limited liability for their shareholders.
Conversely, partnerships issue no shares and some of them have unlimited liability. Another key difference is that the partners in a partnership both own and directly operate the business. In a limited company, the shareholders own the business but there are directors who directly operate it.
There are three different kinds of partnership, all of which have multiple partners who both own and manage the business. These three types are as follows:
A general partnership, which is sometimes just called a partnership, is one of the simpler types of business to set up. A partnership requires multiple owners who jointly share responsibility for the business. This means that they manage the business, share its profits and losses and pay for its expenses. A partnership has an unlimited liability arrangement, so any debts incurred by the business are the responsibility of its owners. Additionally, a partnership pays no taxes on the income it generates, as its owners pay income tax and national insurance on their individual shares of the profits.
There are no registration or incorporation requirements for a general partnership. The partners simply agree on a nominated partner who manages its tax returns, keeps business records and deals with HMRC. General partnerships also lack ongoing filing requirements and the partnership agreement is a private document. This agreement is typically a good idea, but not an absolute requirement. In the absence of such an agreement, the provisions of the Partnership Act 1890 apply to matters of decision making, profit sharing and partners leaving. This applies to all partnership types.
Limited partnership (LP)
A limited partnership includes both general and limited partners and there has to always be at least one of each. These types of partners have different liability levels and responsibilities in the business, although they all pay tax on their respective profit shares. A limited partner contributes to the establishment costs of the business and is only liable for the amount they initially invested. Limited partners can't manage the business directly nor withdraw their original contribution. A general partner is like one in a normal partnership where they have unlimited liability, run the business directly and make binding decisions.
Unlike a general partnership, a limited partnership has to register the business at Companies House, in addition to registering with HMRC for self assessment. If the business's sales exceed £85,000 per year then it's also a requirement to register the business for VAT. These registration and related responsibilities belong solely to the general partners. They also differ from general partnerships because they have some ongoing filing requirements, although they share the fact that the partnership agreement is private and non-mandatory.
Limited liability partnership (LLP)
The third kind of partnership is the LLP, where all the partners in the business have limited liability. This means that none of the partners bear responsibility for the business's debts beyond their initial investment, but pay taxes on their incomes from the profits. An ordinary member of an LLP is therefore both an owner and decision-maker in the business and has limited liability. This differs from a designated member, of which an LLP requires at least two. These are similar to nominated partners in general partnerships, whereby they have extra responsibilities regarding company accounts and dealing with HMRC.
These designated members' responsibilities include registering the business with HMRC, registering it for VAT if sales exceed £85,000 per year, keeping company accounts, appointing auditors if necessary, sending annual accounts to Companies House and acting on behalf of the business if it's dissolved. LLPs are also required to register at Companies House, meet ongoing filing requirements and maintain the privacy of their partnership agreements. For LLPs, there's sometimes a division between equity members and fixed share members. The former make capital contributions and get a profit share, whereas the latter have lower equity holdings in exchange for fixed minimum payments.
Limited company types
A limited company is a business structure that issues shares to shareholders and has a board of directors. There are two main types of limited companies, which are as follows:
Private limited company (LTD)
There are two variations of private limited companies, which are a private company that's limited by shares and a private company that's limited by guarantee. Limited by guarantee means that the business is typically not run to make a profit, is legally separate from those who run it, keeps its own finances, invests its profits back into the company and has guarantors. It doesn't have shareholders and instead has members. Every member of the company guarantees the company's debts up to an agreed-upon amount, although there's no unlimited liability in any case. These are often NGOs, charities and clubs.
A private company that's limited by shares has shareholders and a board of directors. For this type of company, the shareholders who own the business can't run it directly, so they elect at least one director. There's also no upper limit on the number of shareholders. It's a requirement for these types of companies to issue a statement of capital, which provides information on its shares including their number, total value and the names and addresses of all the shareholders. Shares in this type of business are only tradable privately and shareholders can't sell them on the stock exchange.
Public limited company (PLC)
A PLC is similar to an LTD company, with one of the main differences being that it can sell its shares on a stock exchange. All of the company's shareholders have limited liability, meaning they're only responsible for the amount they invested in the company. To qualify as a PLC, the business has to have issued share capital with a value of at least £50,000 and have sold at least a quarter of this prior to registration. A PLC also requires at least two shareholders and two directors. Moreover, a PLC requires a company secretary with an ICSA qualification.
It's a requirement for PLCs to register at Companies House, just like LTDs. PLCs also pay corporation tax, unlike partnerships. All PLCS are also required to hold an annual general meeting (AGM). It's much easier for a PLC to change its owners and rapidly raise capital than it is for partnerships or even LTDs.
Related: What is a private limited company?
Key differences between partnerships and limited companies
Here are some of the most important differences between the various types of partnerships and limited companies:
Liability: With the exception of a limited liability partnership (LLP), all partnership types have at least one member with unlimited liability. There's no limited company type where an owner has unlimited liability.
Shareholders: None of the partnership business types can issue shares, instead, the ownership of the business belongs to the partners. Limited companies issue shares to shareholders, although only a PLC can do so on a stock exchange.
Directors: In all partnership types, the owners are also the primary decision-makers who run the business. Conversely, the shareholders who own a limited company can't run it directly and instead elect directors for this purpose.
Taxation: Partnerships don't pay corporation tax on their profits, instead, each partner simply pays income tax and national insurance on their share of the profits. Limited companies do pay corporation tax on their profits, after which anyone who receives income from the company also pays their own personal taxes.
Registration: It's a requirement for all limited companies to register at Companies House. For partnerships, it's only a requirement for limited partnerships and LLPs to do this.
Partnerships and limited companies FAQs
Here are some frequently asked questions and answers about partnerships and limited companies:
Do private limited companies require multiple shareholders?
No, a private limited company can have only one shareholder. This is still the case if this individual is also acting as the director. LTDs also don't require a company secretary, unlike PLCs.
Are there requirements to be a company director for a PLC or LTD?
Yes, to be a company director, an individual has to be between 16 and 70 years of age. It's also necessary that these individuals have no court decisions that would disqualify them from the role. Additionally, these individuals can't be subject to any immigration restrictions that prevent them from working as a director.
Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.
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