Most multi-partner UK law firms are LLPs, not general partnerships. The conversion happened largely in the 2000s after LLPs were introduced in 2001. But the structural choice still recurs — for new firms, for small partnerships considering conversion, and for understanding the FA 2014 Salaried Member Rules that can quietly turn "partners" into "employees" for tax purposes.
This guide is the practical comparison. We cover how each structure is taxed, what limited liability actually means in practice, the FA 2014 mechanics with worked examples, capital and succession differences, and the conversion process.
The four structural options in UK law firm practice
Sole practitioner
One solicitor trading as a sole trader. Taxed personally on all profit at income tax + Class 4 NI rates. Unlimited personal liability for firm obligations. SRA-regulated under sole practitioner rules with the same Accounts Rules and PII obligations as any other firm. Suits genuinely solo firms with low liability exposure.
General partnership
Two or more solicitors trading together under the Partnership Act 1890. Each partner is taxed on their share of profit at personal rates. The partnership itself doesn't pay corporation tax. Unlimited personal liability for all partners — joint and several. Pre-LLP introduction this was the default; few new firms choose general partnership today.
LLP (Limited Liability Partnership)
Same tax treatment as a general partnership (members taxed personally on share of profit) but with limited liability protection courtesy of the LLP Act 2000. Separate legal personality but no corporation tax filing. Files an SA800 partnership tax return and LLP accounts at Companies House. The default structure for new multi-partner law firms.
Limited company (Ltd or PLC)
The company itself pays corporation tax on its profits. Solicitor-shareholders extract profit via salary (PAYE) and/or dividends. The company is SRA-regulated as an Alternative Business Structure (ABS) if non-solicitors own or control it; as a Recognised Body if solicitors own and control it. Limited but growing — most law firms remain LLP or partnership-structured.
Tax treatment compared
Partnership / LLP — tax-transparent
For tax purposes, partnerships and LLPs are functionally identical. Each member or partner is taxed on their share of profit at personal rates: income tax (20% / 40% / 45%) plus Class 4 NI (6% / 2%). The partnership / LLP files an SA800 partnership tax return showing total profit and allocation between members; each member then files their personal self-assessment.
The "tax-transparent" label means no separate corporation tax filing. The LLP's separate legal personality (which gives the liability protection) doesn't create a separate tax person.
Limited company — corporation tax + dividend tax stack
The company pays corporation tax on its profits: 19% on the first £50,000, marginal relief between £50,000 and £250,000, 25% above £250,000. Shareholders then pay dividend tax on dividends received: 8.75% / 33.75% / 39.35% over the £500 dividend allowance. The two layers stacked typically equal or slightly beat the partnership/LLP personal rate for higher earners, but the headline saving is smaller than commonly believed.
The FA 2014 Salaried Member Rules
From 6 April 2014, a member of an LLP is deemed an employee for tax purposes — meaning PAYE applies to their drawings — if all three of the following conditions are met. (Note: these rules apply to LLP members specifically. General partnership partners are not subject to the same rules.)
Condition A — Disguised salary
At least 80% of the total reward the member receives from the LLP is "disguised salary" — fixed or determined without reference to profit. A pure profit-share member fails Condition A (their reward is entirely variable with profit). A fixed-share member who gets £80,000 fixed plus £5,000 profit-linked bonus passes Condition A (94% fixed).
Condition B — Limited influence
The member has only limited rights to influence the LLP's affairs. Members who attend management meetings as voting equals, share in management decisions, and have unrestricted access to firm information fail Condition B (they have meaningful influence). Members excluded from management decisions and treated as "fee-earners with a partner badge" pass Condition B.
Condition C — Capital contribution
The member's capital contribution is less than 25% of their disguised salary for the period. A member with £80,000 disguised salary needs £20,000 of capital to fail Condition C (and therefore be treated as a partner). With £10,000 of capital, they pass Condition C (and may be deemed employee depending on A and B).
All three or no deemed-employee status
Critically, the deemed-employee treatment only applies if ALL THREE conditions are met. Failing any single condition keeps the member as partner for tax. This is why capital contribution structuring (Condition C) is the most common defensive lever — bumping a member's capital to 26%+ of their disguised salary breaks the chain.
Worked example: Sarah the fixed-share partner
Sarah is a 5-year qualified solicitor recently promoted to fixed-share partner at her LLP. Her terms:
- Fixed drawings: £90,000/year
- Profit-linked bonus: 5% of profit above £400,000, capped at £15,000
- Capital contribution: £20,000 (loan-financed)
- Management role: votes only on partner admissions and partnership agreement amendments
Condition A test: total reward £90k + £15k (max) = £105k. Disguised salary £90k. Ratio 90/105 = 85.7%, above the 80% threshold. Condition A satisfied.
Condition B test: limited management influence (votes on only two specific matters). Condition B satisfied.
Condition C test: capital £20,000, disguised salary £90,000. Ratio 22.2%, below the 25% threshold. Condition C satisfied.
All three conditions satisfied. Sarah is deemed an employee for tax. PAYE applies to her drawings as if they were salary. The LLP must operate PAYE on her £90k fixed + any bonus, with employer NI on top.
Fixing Sarah's position
The cleanest fix is to lift Sarah's capital contribution above 25% of disguised salary. Bumping capital from £20,000 to £23,000 (25.6% of £90k) breaks Condition C. Sarah reverts to partner treatment for tax — Class 4 NI on her profit share instead of Class 1 employer/employee NI on her drawings.
The bank may need to fund the additional capital; qualifying loan interest relief under ITA 2007 s.398 makes the interest deductible from Sarah's personal taxable income.
Capital, succession, and partner exit
Capital contribution mechanics
LLPs require members to contribute capital — the amount governed by the LLP agreement. Typical structures:
- Equity partners: £50,000-£300,000+ depending on firm size and seniority
- Fixed-share / salaried members: £15,000-£50,000 (lower because of Condition C dynamics)
- Capital usually loan-financed; qualifying loan interest relief applies
- Capital sits on the member's capital account, earning interest at a rate set in the LLP agreement
General partnerships work similarly but the unlimited liability changes the risk calculus on the amount of capital members are willing to commit.
New member admission
Bringing in a new member requires:
- Capital contribution from the new member (loan-financed if needed)
- Profit-share reallocation among existing members
- LLP agreement amendment
- Companies House filing (LL IN01 for the change in members)
- HMRC notification for the partnership tax return
Member retirement
The LLP agreement governs. Typically:
- Retiring member's capital returned (often phased over 1-3 years)
- Final profit share calculated up to leaving date
- Any vested deferred compensation paid out (or phased)
- Possible BADR claim if the retirement constitutes disposal of a qualifying business interest
The conversion: partnership to LLP
For firms still structured as a general partnership, conversion to LLP is typically straightforward. The process:
Months 1-2 — agreement
- Update the partnership agreement into LLP agreement form (most clauses transfer; some need adjustment for the LLP context — fixed-term provisions, decision-making, voting rights)
- Consult the firm's bank on banking arrangements
- Confirm PII renewal date and whether the conversion fits the cycle
Months 3-4 — incorporation
- File LL IN01 at Companies House to incorporate the LLP
- Open new bank accounts in the LLP's name
- Notify the SRA of the structural change
- Transfer trade and assets to the LLP at book value (no CGT event under standard treatment)
Months 5-6 — transition
- Novate client matters (where required by the matter terms)
- Update letterhead, website, email signatures, professional indemnity policy
- HMRC notifications: partnership cessation, LLP commencement, VAT registration transfer
- First LLP year-end accounts filed
Decision framework
Stay general partnership if:
- Two-partner firm with low turnover and minimal liability exposure
- Companies House filing obligation feels disproportionate
- All partners explicitly comfortable with unlimited joint and several liability
Convert to LLP if:
- Three or more partners
- Material liability exposure (conveyancing, commercial, any regulated work)
- Plan to grow partner headcount
- Plan to admit fixed-share / salaried members (FA 2014 applies to LLP members, which gives you the audit lever)
Incorporate as Ltd if:
- Non-solicitor capital wants to come in (requires ABS licence)
- Specific corporate transaction strategy requires it
- You've modelled both and Ltd genuinely wins on your numbers
What we'd do if you brought us in
Our structure-review engagement covers:
- Three-structure tax comparison on your actual numbers
- FA 2014 Salaried Member audit for each LLP member (or modelling for general partnership conversion)
- Capital contribution structuring to fix or maintain partner-tax treatment
- Conversion project management if moving from partnership to LLP
- ABS consideration if non-solicitor capital is on the table
Book a 30-minute scoping call via the form below.