Every profitable firm asks it, and most of the answers online do the tax and stop. The tax matters — and the April 2026 dividend rise changed it — but three SRA consequences change the decision as much as the arithmetic does.
If your partners take out essentially everything the firm earns each year, an LLP is often the cheaper structure — and from 6 April 2026 it became more clearly so, because dividend rates rose. If the firm needs to retain profit to fund work in progress, lockup, a lateral hire or an acquisition, a company is the only structure that lets it retain at 19% to 25% rather than at the partner's 42% or 47%.
That is the whole tax question in two sentences. The rest of this page is the arithmetic behind it, and then the three regulatory consequences that most comparisons never mention — which is unfortunate, because for a law firm they can matter more than the tax.
The tax
The LLP is transparent. Each member is taxed personally on their allocated profit share: income tax at 20%, 40% and 45%, plus Class 4 national insurance at 6% between £12,570 and £50,270 and 2% above. Marginal cost: 42% above £50,270, 47% above £125,140. Tax follows the allocation whether or not the money is drawn, payments on account fall due each 31 January and 31 July, and there is no way to retain profit tax-efficiently inside the firm.
Corporation tax first: 19% up to £50,000, 25% over £250,000, and an effective 26.5% on the slice between them. Both limits are divided by the number of associated companies plus the company itself — which is the part that catches people out. One associated company means dividing by two, giving limits of £25,000 and £125,000; three associated companies means dividing by four, giving £12,500 and £62,500. Then extraction: salary, which carries 15% employer national insurance, or dividends, which from 6 April 2026 are taxed at 10.75%, 35.75% and 39.35%, with a £500 dividend allowance. That rise — from 8.75% and 33.75% — is the single biggest recent change to this arithmetic, and it moved the answer for firms that extract everything.
Illustrative only, on 2026/27 rates, ignoring the personal allowance taper, the dividend allowance, any salary and any associated companies. Take a £60,000 slice of profit for one owner who is already a higher-rate taxpayer.
Read that honestly and it says something specific: full extraction from a company is now more expensive than an LLP for a higher-rate owner, and retention is materially cheaper. Firms that took the incorporation decision on pre-April-2026 dividend rates should revisit it. Run your own numbers on the LLP versus limited company calculator.
The part most comparisons miss
Under the SRA Authorisation of Firms Rules, a firm may be authorised as a recognised body only where all of its managers and interest holders are legally qualified. If any non-lawyer is a manager or holds an ownership interest, the firm cannot be a recognised body and must be authorised as a licensed body — an ABS — which is a different and more onerous route. Rule 9.1 separately requires SRA approval of any manager or owner. So bringing in a non-lawyer finance director as a member of the LLP, or issuing shares in the company to a spouse, is a regulatory decision before it is a tax one. A company also has to be incorporated and registered in England and Wales, Scotland or Northern Ireland under the Companies Act 2006, with at least one practising address in the UK.
The minimum terms and conditions in the SRA Indemnity Insurance Rules set the sum insured for any one claim, exclusive of defence costs, at at least £3 million where the firm is a relevant recognised body or relevant licensed body, and at least £2 million in all other cases. In practice: an LLP or limited company needs £3 million; a sole practitioner or a traditional partnership of individuals needs £2 million. There is no monetary limit on defence costs, and six years of run-off cover is required on cessation. Incorporating therefore has a premium consequence, and the run-off obligation is one of the largest liabilities a closing firm faces.
Rule 1.2 of the SRA Accounts Rules makes the authorised body's managers jointly and severally responsible for compliance by the body, its managers and its employees with those rules — whatever the legal form. Limited liability protects individuals from the firm's ordinary trading debts. It does not stand between a manager and their regulatory responsibility for the client account. If the reconciliations are not being done, the entity type changes nothing about who answers for that.
Two more points that are the same either way, and are worth knowing before the decision rather than after. Both LLPs and limited companies file accounts at Companies House and those accounts are public; a traditional partnership of individuals is the only genuinely private structure. And both share the same statutory audit thresholds — for periods beginning on or after 6 April 2025, two of turnover not more than £15 million, balance sheet total not more than £7.5 million and not more than 50 employees.
Your actual profits and drawings modelled both ways on 2026/27 rates, including the April 2026 dividend increase and associated companies.
Try the calculatorWho would be a manager or interest holder, whether that keeps you a recognised body, and what rule 9.1 approval means for the timetable.
The £3 million versus £2 million minimum, the unlimited defence costs position and the six-year run-off obligation, quantified before you commit.
What retaining profit at 19% to 25% is actually worth to a firm funding lockup — usually the strongest argument for a company, and the one nobody quantifies.
Lockup calculatorWhat incorporation does to each individual: capital, the salaried members rules, and the second-year payments on account position they are leaving behind.
Partner taxCessation of the old business, transition profits, and the fact that all remaining untaxed transition profit is taxed in the year of cessation if that falls on or before 5 April 2027.
Three things are worth having in front of you: your real profit and drawings for the last two years, your lockup figure, and an honest view of whether the firm intends to retain money or distribute it. Those decide the answer far more than the headline rates do. If you are currently an LLP, the LLPs and partnerships page covers what stays the same whichever way you go; if you are a sole practitioner, note that the £2 million PII minimum is one of the things you would be giving up.
This page is information about how the rules and rates work. It is not legal advice, and the authorisation consequences in particular are a conversation to have with the SRA and your own advisers before anything is filed.
It depends almost entirely on whether the profit is being taken out or left in. An LLP member pays 42% at the margin above £50,270 and 47% above £125,140, on the allocated share whether drawn or not. A company pays corporation tax at 19%, 25% or an effective 26.5% in the marginal band, and extraction costs more on top — from 6 April 2026 dividends are taxed at 10.75%, 35.75% and 39.35%. Take everything out each year and the LLP is often cheaper. Retain profit to fund work in progress, lockup or an acquisition and the company wins, because it is retained at 19% to 25%.
It can change the category, and that is the part most comparisons miss. Under the SRA Authorisation of Firms Rules, a firm can be authorised as a recognised body only if all of its managers and interest holders are legally qualified. If any non-lawyer is a manager or holds an ownership interest, the firm cannot be a recognised body and must be authorised as a licensed body, an ABS, which is a different and more onerous route. Rule 9.1 also requires SRA approval of any manager or owner. Bringing a non-lawyer finance director in as a member or shareholder is therefore a regulatory decision, not just a commercial one.
It depends on the entity, which surprises people. Under the minimum terms and conditions in the SRA Indemnity Insurance Rules, the sum insured for any one claim, excluding defence costs, must be at least £3 million where the firm is a relevant recognised body or relevant licensed body, and at least £2 million in all other cases. In practice that means an LLP or a limited company needs £3 million while a sole practitioner or a traditional partnership of individuals needs £2 million. There is no monetary limit on defence costs, and six years of run-off cover is required on cessation.
No, and this is worth stating plainly because the misconception is common. Rule 1.2 of the SRA Accounts Rules provides that the authorised body's managers are jointly and severally responsible for compliance by the body, its managers and its employees with those rules. That applies whatever the legal form of the firm. Limited liability protects the individuals from the firm's ordinary trading debts; it does not stand between a manager and their regulatory responsibility for the client account. If the reconciliations are not being done, incorporating changes nothing about who answers for it.
No. An LLP files accounts at Companies House and they are publicly visible, exactly as a limited company's are. The only genuinely private structure is a traditional partnership of individuals, which files nothing at Companies House at all. Firms considering the move from partnership to LLP for limited liability reasons should factor that in, because the accounts become readable by competitors, recruiters, landlords and clients. Both LLPs and companies also share the same statutory audit thresholds, so the audit position does not differ between them either.
A free conversation covering the tax both ways, the authorisation category, the PII consequence and what retention is worth to your firm. Often the answer is to stay as you are — we will say so.
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