If your firm is an LLP and someone has told you a limited company would leave you better off, the honest answer turns almost entirely on one question: do you draw your profits, or do you need to keep them in the firm? Incorporating rarely wins on extraction and often wins on retention — and there are three SRA consequences that can settle the question before the tax does.
Guide · Updated August 2026
A limited company is a good idea for a law firm that needs to keep profit inside the business — to fund work in progress, to buy another firm, to survive a bad quarter — because retained profit is taxed at 19% to 25% instead of 42% to 47%. It is usually a bad idea for a firm whose partners draw everything they earn, because on 2026/27 rates the combined cost of corporation tax plus dividends is higher than the cost of being taxed as a member of an LLP. Everything below is the working.
An LLP is transparent for tax. Section 863 of ITTOIA 2005 treats the LLP as a partnership, so the LLP itself pays no tax on its profits; each member is taxed individually on their share. That has three consequences that matter more than the headline rate.
There is one band that catches people out. The personal allowance is withdrawn by £1 for every £2 of income over £100,000, so between £100,000 and £125,140 the effective income tax rate is 60% and the all-in marginal cost of profit share is 62%. Income tax thresholds are frozen until 5 April 2031, so more of every future profit share falls into the higher bands by default.
A company pays corporation tax first, then you pay again to get the money out. Corporation tax for the financial year beginning 1 April 2026 is 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief between the two using the 3/200 standard fraction — an effective marginal rate of 26.5% on the slice between the limits. Both limits are reduced proportionately, shared between the company and its associated companies: a company with three associated companies is one of four, so the limits are divided by four and become £12,500 and £62,500 rather than £50,000 and £250,000. A service company and a property company alongside the trading company are enough to move the goalposts, and firms rarely count them. Corporation tax is due nine months and one day after the period end.
Extraction is where the arithmetic has moved. Salary is deductible for the company but carries employer National Insurance at 15% above the £5,000 secondary threshold. Dividends are not deductible, and from 6 April 2026 the dividend rates rose to 10.75% (ordinary), 35.75% (upper) and 39.35% (additional), up from 8.75% and 33.75%. The dividend allowance stays at £500. That two-point increase is the single biggest recent change to this decision, and it moved it against incorporating.
Worked example — illustrative. The marginal cost of £100 of firm profit in 2026/27, ignoring the £500 dividend allowance, comparing an LLP member with a shareholder-director taking dividends:
| Where the individual sits | LLP member | Company at 19% CT | Company at 25% CT |
|---|---|---|---|
| Basic rate | 26.0% | 27.7% | 33.1% |
| Higher rate | 42.0% | 48.0% | 51.8% |
| Additional rate | 47.0% | 50.9% | 54.5% |
| Profit kept in the firm | 42% or 47% | 19% | 25% |
Read the bottom row twice. On extraction the LLP wins in every band. On retention it loses badly, because an LLP member is taxed on undrawn profit at their full marginal rate while a company pays 19% to 25% and keeps the rest working.
Put a number on it. A firm wants to leave £50,000 in the business to fund lockup. In an LLP, with members already above £125,140, that £50,000 is still allocated and taxed at 47% — £23,500 of tax on money nobody has drawn, funded from somewhere else, and feeding next year's payments on account. In a company paying 25%, retaining the same £50,000 costs £12,500 and leaves £37,500 inside the firm. That is £11,000 a year of difference on one decision — and the mirror image is that if the same £37,500 is later paid out as a dividend at 39.35%, the shareholder nets £22,744 against the LLP member's £26,500.
So the question is not which structure is cheaper. It is how much of what this firm earns needs to stay in it. Our LLP vs limited company calculator runs your own profit figure through the same arithmetic, and the structure review page explains how we model it properly.
Both structures are permitted. What matters is which authorisation category you land in. Rule 1.1 of the SRA Authorisation of Firms Rules gives three routes: a licensed body (an ABS), a recognised body — available only where all managers and interest holders are legally qualified — and a recognised sole practice for a solicitor or REL who is the sole principal.
The trap is ownership. Bring in an outside shareholder, give equity to a non-lawyer finance director, or admit a non-lawyer as a member of the LLP, and the firm can no longer be a recognised body. It must be authorised as a licensed body, which is a different and more demanding route. Under Rule 9.1 the SRA must approve any manager or owner in any case, so a change of structure is never just a Companies House filing. Rule 1.3 also requires a company to be incorporated and registered under Parts 1 and 2 of the Companies Act 2006, with at least one practising address in the UK.
This one is a hard number and it surprises people. Clause 2.1 of the Minimum Terms and Conditions in the SRA Indemnity Insurance Rules requires a sum insured for any one claim, exclusive of defence costs, of at least £3 million where the firm is a relevant recognised body or a relevant licensed body, and at least £2 million in all other cases. The SRA Glossary defines the £3m category by exclusion, and the exclusion catches partnerships with a corporate or limited-liability partner. In plain terms: LLPs and limited companies need £3m; sole practitioners and traditional partnerships of individuals need £2m.
Two further terms belong in the same paragraph. Clause 2.2 puts no monetary limit on defence costs, and clause 5.4 requires six years' run-off cover when the firm ceases. Run-off is a real cost of closing, and it is the reason a structure decision and a succession plan should be made in the same conversation.
Rule 1.2 of the SRA Accounts Rules is one sentence long and it does more work than any other line in this guide: the authorised body's managers are jointly and severally responsible for compliance by the body, its managers and its employees with the rules. Limited liability protects you from the firm's trade creditors. It does not put a company between you and the client account. If you are a manager of a law firm limited company and there is a shortfall, you are jointly and severally responsible for it — exactly as you would be in a partnership.
Whatever the structure, Rule 9.4 of the Authorisation of Firms Rules still requires a lawyer with at least three years' practice to supervise the work.
Incorporating does not usually mean an audit, but it is worth knowing where the line is. For accounting periods beginning on or after 6 April 2025 (SI 2024/1303), a company or an LLP is exempt from statutory audit if it meets at least two of three tests: turnover not more than £15 million, balance sheet total not more than £7.5 million, and not more than 50 employees. The micro-entity limits from the same date are £1 million of turnover and a £500,000 balance sheet. The thresholds apply to LLPs as well as companies.
A statutory audit and an SRA Accountant's Report are different things. Most law firm LLPs are well below the audit thresholds and have no statutory audit — but if they hold client money above the exemption limits they still need the annual report under Rule 12 of the Accounts Rules, signed by an accountant who is a member of ICAEW, ICAS, ACCA or ICAI and is, or works for, a registered auditor.
On privacy, there is no difference between the two: an LLP files accounts at Companies House just as a company does, and both are publicly visible. A traditional partnership of individuals is the only genuinely private structure available to a law firm — which is a real consideration for a firm that does not want its profit per partner readable by its competitors, and one that a tax-only comparison never mentions.
If the pressure to incorporate is coming from cash rather than tax, the structure may not be the problem. A firm that cannot fund its own growth usually has too much money sitting in unbilled work and unpaid bills — see our guide to lockup, WIP and where the cash goes. Fixing 20 days of lockup often releases more cash than incorporating ever will. If your LLP has fixed-share partners, read the salaried members rules before you change anything, because a restructure can quietly turn a member into an employee for tax.
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It depends on whether you draw your profits or keep them. On 2026/27 rates an LLP member pays 42% on profit share above £50,270 and 47% above £125,140, including Class 4 National Insurance. A company pays corporation tax at 19% up to £50,000 and 25% above £250,000, with a 26.5% effective marginal rate in between — but taking the money out as dividends at 10.75%, 35.75% or 39.35% from 6 April 2026 pushes the combined cost above the LLP figure in every band. So a company wins clearly on retained profit and loses on fully extracted profit. Work out how much your firm actually needs to keep, then decide.
Yes, and it is the consequence firms most often miss. Clause 2.1 of the Minimum Terms and Conditions in the SRA Indemnity Insurance Rules requires a minimum sum insured for any one claim, excluding defence costs, of at least £3 million for a relevant recognised body or relevant licensed body, and at least £2 million in all other cases. In practice that means LLPs and limited companies need £3 million, while sole practitioners and traditional partnerships of individuals need £2 million. Clause 2.2 places no monetary limit on defence costs, and clause 5.4 requires six years of run-off cover when the firm ceases. Get quotations at both levels before deciding.
Only as a licensed body. Rule 1.1 of the SRA Authorisation of Firms Rules allows authorisation as a recognised body only where all managers and interest holders are legally qualified. A single non-lawyer shareholder, or a non-lawyer manager, takes the firm outside that category and into the licensed body route, which is a different and more demanding authorisation. Rule 9.1 requires the SRA to approve any manager or owner in any event, so ownership changes are never purely a Companies House matter. This bites hardest on firms planning outside investment or on giving equity to a non-lawyer finance director.
Usually not. For accounting periods beginning on or after 6 April 2025, under SI 2024/1303, a company or LLP is exempt from statutory audit if it meets at least two of three tests: turnover not more than £15 million, balance sheet total not more than £7.5 million, and not more than 50 employees. The micro-entity limits are £1 million of turnover and a £500,000 balance sheet. Those thresholds apply to LLPs too. A statutory audit is a separate thing from the SRA Accountant's Report: a firm holding client money above the exemption limits needs the report under rule 12 whether or not it has an audit.
No. 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 the rules. Limited liability protects you from the firm's ordinary trade creditors; it does not put the company between you and the client account. If there is a shortfall on client money, the managers of a law firm limited company are responsible for it on the same basis as partners in a partnership. Rule 9.4 of the Authorisation of Firms Rules also still requires a lawyer with at least three years of practice to supervise the work, whatever the structure.
It moved the arithmetic against incorporating for firms that draw everything. From 6 April 2026 the ordinary dividend rate rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75%; the additional rate stayed at 39.35% and the dividend allowance stayed at £500. Combined with corporation tax, a higher-rate shareholder in a company paying 25% now loses about 51.8% of a marginal £100 of profit, against 42% for an LLP member. At the additional rate the figures are roughly 54.5% against 47%. The case for a company is now almost entirely about retaining profit inside the firm rather than extracting it.
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