Should a Solicitor Trade as a Limited Company or LLP

Introduction

Solicitors in England and Wales can operate as sole practitioners, partnerships, limited companies, or limited liability partnerships. However, most modern law firms choose either a limited company or an LLP because both provide limited liability protection and greater flexibility in ownership and management.

The decision depends on commercial, tax, and regulatory factors, as well as how you plan to grow the firm and distribute profits.

Understanding the key structures

Limited company

A limited company is a separate legal entity incorporated at Companies House. It is owned by shareholders and managed by directors. The company earns income, pays Corporation Tax on its profits, and can distribute after-tax profits to shareholders as dividends.

In the legal sector, a solicitor can form a limited company authorised and regulated by the Solicitors Regulation Authority (SRA) as an Alternative Business Structure (ABS) or a traditional solicitor-owned firm.

Limited liability partnership (LLP)

An LLP combines features of a partnership and a company. It is a separate legal entity that must also be registered at Companies House. Unlike a traditional partnership, the members (partners) have limited liability for the firm’s debts.

LLPs are taxed differently from limited companies. Each member is treated as self-employed and pays Income Tax on their share of profits, rather than the LLP paying Corporation Tax.

Key differences between a limited company and LLP

1. Taxation

Limited company:

Pays Corporation Tax (currently 25 percent for most companies) on its profits.

Directors can draw a salary and dividends, which are taxed separately.

Profits can be retained in the company for reinvestment, offering flexibility in managing personal tax exposure.

LLP:

The LLP itself does not pay Corporation Tax.

Each member is taxed individually through Self Assessment on their share of profits at their marginal Income Tax and National Insurance rates.

Profits are taxed whether withdrawn or not, offering less flexibility for deferring income.

For high-earning solicitors, operating as a limited company can sometimes lead to a lower overall tax burden, especially when profits are retained for future growth.

2. Profit distribution

Limited company:
Profits are distributed to shareholders through dividends, which can be paid in proportion to share ownership or structured through different share classes.

LLP:
Profits are allocated to members based on the LLP agreement. This structure allows greater flexibility in varying profit shares or rewarding performance, which can be beneficial in multi-member firms.

3. Liability

Both structures provide limited liability protection, meaning members or shareholders are not personally responsible for business debts beyond their investment in the firm.

However, solicitors remain personally liable for professional negligence. Therefore, professional indemnity insurance remains mandatory for both structures under SRA rules.

4. Regulatory requirements

Both limited companies and LLPs must register with Companies House and submit annual accounts and confirmation statements.

If providing legal services, both must also be authorised and regulated by the SRA.

A limited company must have at least one solicitor or registered manager authorised to supervise legal work.

An LLP must appoint a compliance officer for legal practice (COLP) and a compliance officer for finance and administration (COFA), as must an incorporated firm.

In practice, the regulatory burden is similar for both.

5. Administrative and accounting complexity

Limited companies typically have stricter accounting and filing requirements, including Corporation Tax returns, PAYE payroll for directors, and dividend documentation.

LLPs require partnership-style accounting but still file annual accounts and members’ details publicly. In both cases, professional accountancy support is essential.

6. Raising capital

Limited companies can issue shares to raise funds, which may appeal to external investors or potential merger partners.

LLPs cannot issue shares but can admit new members who contribute capital or expertise. This makes LLPs more suitable for firms that value flexible ownership without external shareholders.

7. Perception and credibility

A limited company structure can appear more corporate and may be preferred by commercial clients or investors. It can also signal stability and long-term strategy.

LLPs, on the other hand, are often seen as more traditional and collaborative, reflecting the partnership ethos of many law firms.

Which structure is better for a solicitor firm

When a limited company works best

You plan to retain profits within the business for growth.

You want to optimise tax efficiency and reduce personal tax exposure.

You may seek outside investment or eventually sell shares in the business.

You prefer a more corporate governance model with directors and shareholders.

When an LLP works best

You want flexibility in profit sharing and management roles.

You prefer a partnership-style culture with less emphasis on corporate structure.

You value transparent profit allocation and collaboration among members.

You are comfortable being taxed personally on all profits earned.

In practice, many law firms start as LLPs for flexibility and later convert to limited companies as they grow or look to manage tax more efficiently.

Example scenario

Scenario 1 The small firm:

Two solicitors launch a high-street practice offering conveyancing and family law services. They choose an LLP to share profits equally and maintain a partnership-style working relationship. As the firm grows, they may consider incorporation for tax and growth reasons.

Scenario 2 The growing corporate practice:

A commercial law firm with multiple departments and plans to expand nationally forms a limited company. It retains profits to reinvest in marketing and technology, paying directors a mix of salary and dividends to optimise tax efficiency.

Other considerations

When deciding between a limited company and an LLP, solicitors should also think about:

Succession planning: Limited companies allow smoother ownership transfer through share sales.

Pension planning: Directors in companies can make employer pension contributions before tax.

External investors: Only limited companies can bring in non-lawyer shareholders through Alternative Business Structure (ABS) status.

Public disclosure: Both entities file accounts publicly, but company directors’ details are generally more visible.

Professional advice

Because each firm’s financial and regulatory circumstances differ, it is essential to consult a solicitor accountant or business adviser before deciding. They can model tax outcomes, evaluate compliance implications, and help structure ownership agreements to meet your firm’s goals.

Conclusion

Both limited companies and LLPs offer limited liability and professional credibility, but they differ in tax treatment, flexibility, and profit management.

An LLP suits solicitors seeking a partnership culture and flexible profit sharing, while a limited company offers more control over tax efficiency and reinvestment. The right choice depends on your firm’s size, growth ambitions, and long-term strategy.

By understanding the advantages of each structure and taking professional advice, solicitors can choose the business model that best supports compliance, profitability, and sustainable growth.