SRA authorisation and structure

Before any tax comparison, the starting point is whether a given structure is compatible with SRA authorisation. The position is:

  • Partnerships (including ordinary partnerships under the Partnership Act 1890) are recognised bodies and can be authorised by the SRA to provide legal services.
  • LLPs are recognised bodies and can be authorised directly.
  • Limited companies can be recognised bodies under the SRA's Alternative Business Structure (ABS) route, but they require a separate licence rather than simple authorisation. The ABS application process is more involved than a standard recognised body application, though it is well-established and most SRA-regulated law firms that incorporate as limited companies do so successfully.
  • Sole traders can be authorised as sole practitioners for most work, but cannot be recognised bodies for activities requiring a recognised body licence (such as certain conveyancing and probate services). This is relevant for sole practitioners considering growth.

The SRA's minimum terms for professional indemnity insurance apply equally to partnerships, LLPs and limited companies. The minimum cover is £2 million per claim for most firms and £3 million per claim for firms carrying out conveyancing or probate work. Structure does not affect the PII minimum terms.

How LLPs are taxed

An LLP is tax-transparent. The LLP itself does not pay tax; instead, each member is taxed on their allocated profit share as though they were self-employed. This means:

  • Each member pays income tax on their profit share under the self-assessment system
  • Each member pays Class 4 National Insurance: 6% on profits between £12,570 and £50,270, and 2% above £50,270 (2026/27 rates)
  • Class 2 NIC is no longer required for members with profits above the small profits threshold (the requirement to pay was removed from 6 April 2024); such members still build state pension entitlement without paying it. Members with profits below the threshold can pay Class 2 voluntarily to protect their record
  • Members with profits above £100,000 lose part of their personal allowance (£1 of allowance is lost for every £2 of income above £100,000)
  • Profit can be flexibly allocated between members each year, subject to the LLP agreement

The flexibility in profit allocation is a significant practical benefit for partnerships where profit contributions vary from year to year. It is also relevant where different partners have different levels of income outside the LLP (and therefore different effective marginal rates), allowing total tax to be minimised by allocating more profit to lower-rate partners where appropriate and where commercially justified.

The salaried-member rules: the LLP trap

The salaried-member rules (ITTOIA 2005 s.863A, introduced in the Finance Act 2014) prevent a partnership from reclassifying employees as LLP members purely to convert PAYE/NIC costs into self-employment income. A member who meets all three of the following conditions is treated as an employee for income tax and NIC purposes, despite being a member of the LLP:

  1. Disguised salary: at least 80% of the member's remuneration from the LLP is in the form of a guaranteed fixed amount (a floor that does not vary with profits)
  2. Significant influence: the member does not have significant influence over the affairs of the LLP
  3. Capital contribution: the member's capital contribution is less than 25% of their disguised salary

All three conditions must be met for the rules to apply. A member with meaningful variable profit participation (not more than 80% guaranteed), or who has real influence over management, or who has contributed sufficient capital, falls outside the rules.

The practical consequence for LLPs that take on salaried members in the genuine employee sense is that those individuals are taxed as employees: PAYE must be operated, employer NIC at 15% is payable on earnings above the £5,000 secondary threshold (2025/26 onwards), and the firm must account for this cost when comparing an LLP structure with a limited company.

How limited companies are taxed

A limited company pays corporation tax on its profits. The rates for 2026/27 are:

  • 19% on profits up to £50,000 (the small profits rate)
  • 25% on profits above £250,000 (the main rate)
  • Marginal relief applies between £50,000 and £250,000, producing an effective rate of 26.5% on profits in that band

After paying corporation tax, the company can distribute after-tax profits to shareholders as dividends. The individual shareholder pays dividend tax at:

  • 8.75% on dividends within the basic rate band (after the £500 dividend allowance)
  • 35.75% on dividends in the higher rate band
  • 39.35% on dividends in the additional rate band

The typical extraction strategy is a combination of salary and dividends. A director-shareholder who sets their salary at the National Insurance secondary threshold (£5,000 for 2025/26 onwards) pays no employer NIC on salary up to that level. Taking salary up to the personal allowance (£12,570) uses the income tax personal allowance with no NIC cost. Extracting remaining profits as dividends gives a combined tax cost of corporation tax plus dividend tax.

Employer NIC at 15% applies to salary above the £5,000 secondary threshold. For a director on £12,570 salary, employer NIC is £7,570 x 15% = £1,135.50.

The actual numbers: LLP versus limited company

The right answer depends on the profit level and the amount extracted. The accompanying Excel model lets you input your own figures. As a general orientation:

At lower profit levels (roughly below £80,000), the LLP (or sole trader) structure often produces a higher after-tax take-home because the combined income tax and Class 4 NIC burden is lower than corporation tax plus dividend tax at the effective combined rate. At higher profit levels, the position reverses for profits retained in the company or reinvested; but for profits fully extracted as salary and dividends, the LLP often remains competitive because dividends are taxed at effective rates (35.75%/39.35%) that are lower than the combined CT + dividend stack only up to a point.

The critical variable is how much profit is actually extracted versus retained. A firm that retains significant profit for investment or growth will benefit more from the limited company structure (because retained profits are taxed only at CT rates until extracted) than a firm that extracts all profit each year (where the combined CT + dividend burden is visible immediately).

BADR and disposals: a structural consideration

Business Asset Disposal Relief (BADR) reduces capital gains tax on qualifying disposals to 18% (for 2026/27; the rate was 14% in 2025/26 and 10% before that). BADR is available on gains up to a £1 million lifetime limit.

For an LLP, a retiring or selling partner disposes of their interest in the partnership. BADR is available on qualifying gains subject to the usual conditions (two-year ownership, material participation).

For a limited company, the disposal is typically of shares. BADR on shares requires the individual to have held at least 5% of the ordinary share capital and at least 5% of the voting rights for at least two years, and to have been an employee or officer of the company throughout. This conditions framework is generally straightforward for owner-managed law firms but must be tracked carefully if the share structure is complex or if new shareholders have been admitted recently.

The BADR lifetime limit of £1 million means the 18% rate applies only to the first £1 million of qualifying gains over a lifetime. Gains above that are taxed at the standard CGT rates (18% basic rate / 24% higher rate for residential property; 18%/24% for other assets from 2024/25). For a firm with a significant goodwill value, the limit may constrain the tax advantage.

Conversion mechanics

Partnership to LLP: a partnership can convert to an LLP by incorporating under the Limited Liability Partnerships Act 2000. The conversion is generally straightforward. Property held by the partnership must be transferred to the LLP; SDLT should not apply if the conditions for relief under Finance Act 2003 s.65 are met (the transferee is a partnership in which the same persons are partners in the same proportions). Capital gains can be deferred under rollover relief provisions where applicable. Take specialist advice on any property held.

LLP to limited company: this is more complex. The LLP's business, assets and liabilities must be transferred to the new company (or to a holding company acquiring a new trading subsidiary). SDLT may apply on property transfers from the LLP to the company (unlike the partnership-to-LLP route, the LLP-to-company route does not have equivalent SDLT relief). Capital gains may crystallise on assets with embedded gains. The SRA will require a new ABS application for the company. Allow six to twelve months for the full process.

Both conversions require careful advance planning: tax structuring, SRA notification and potentially new banking arrangements must all be co-ordinated.

Which structure suits which firm

There is no universally correct answer. The factors that typically point toward an LLP:

  • High profit, fully extracted each year (the combined tax cost is often comparable to limited company)
  • Strong desire for flexible profit allocation between partners
  • No significant retained-profit strategy
  • Partners with varied income tax positions who benefit from flexible allocation
  • Simpler governance and no SRA ABS process required

The factors that typically point toward a limited company:

  • Significant profit retention and reinvestment (retained profits taxed at CT only until extracted)
  • Growth strategy that benefits from corporate investment vehicle
  • External investor or ownership participation by non-solicitors (ABS structure enables this)
  • Long-term exit planning where corporate structure gives more flexibility on deal mechanics

Use the accompanying Excel model to run your own figures. The model takes your revenue, profit and extraction amounts and shows the estimated after-tax position under each structure, using the 2026/27 rates.