Limited liability partnerships

Most important features of LLPs

The key advan­tage of an LLP com­pared with a tra­di­tion­al part­ner­ship is that the mem­bers of the LLP (it is very impor­tant that they should not be called part­ners but mem­bers) are able to lim­it their per­son­al lia­bil­i­ty if some­thing goes wrong with the busi­ness, in much the same way as share­hold­ers in a com­pa­ny have always been able to do. Of course any­one lend­ing mon­ey to the LLP such as a bank may still require per­son­al guar­an­tees from the mem­bers, as they fre­quent­ly do with directors/shareholders in a com­pa­ny.

Where busi­ness own­ers have want­ed to lim­it their per­son­al lia­bil­i­ty in the past, they have nor­mal­ly set up com­pa­nies and any prof­its made by those com­pa­nies are sub­ject to cor­po­ra­tion tax. Div­i­dends paid by the com­pa­nies can then be tak­en as income of the share­hold­ers. LLPs are taxed quite dif­fer­ent­ly in that the prof­its are treat­ed as the per­son­al income of the mem­bers as if they had run their busi­ness as a part­ner­ship.

The tax­a­tion of com­pa­nies and part­ner­ships is very dif­fer­ent but tax­a­tion should not be the main con­sid­er­a­tion in choos­ing a busi­ness vehi­cle. How­ev­er, some LLP mem­bers can be taxed as if they are employ­ees in cer­tain cir­cum­stances (see Tax treat­ment for cer­tain LLP mem­bers, below). We would be very pleased to dis­cuss the impact of this in any par­tic­u­lar case.

LLPs must pro­duce and pub­lish finan­cial accounts with a sim­i­lar lev­el of detail to a sim­i­lar sized lim­it­ed com­pa­ny. LLPs must sub­mit accounts and an annu­al return to the Reg­is­trar of Com­pa­nies each year.

This pub­li­ca­tion require­ment is far more demand­ing than the posi­tion for non-incor­po­rat­ed part­ner­ships and spe­cif­ic account­ing rules may lead to dif­fer­ent prof­its from those of a nor­mal part­ner­ship. The fil­ing dead­line is nine months after the peri­od end. Com­pa­nies House pro­vides a use­ful guide to the require­ments in respect of LLP accounts.

Setting up LLPs or converting an existing partnership

An LLP is set up by a legal incor­po­ra­tion process which involves send­ing cer­tain doc­u­ments to the Reg­is­trar of Com­pa­nies along with the rel­e­vant fee. Although it is not legal­ly nec­es­sary, every LLP should have a thor­ough and com­pre­hen­sive mem­bers’ agree­ment in place and needs to have tak­en legal or pro­fes­sion­al advice about the issues that should be cov­ered by this agree­ment. In the absence of a mem­bers’ agree­ment the law makes a num­ber of assump­tions about the LLP which may not reflect what the indi­vid­ual mem­bers intend­ed should there be a dis­pute.

Exist­ing part­ner­ships can con­vert to an LLP by the process of incor­po­ra­tion and pro­vid­ing there are no changes in mem­ber­ship or in the way in which the part­ner­ship oper­ates, there may well be no impact on the partnership’s tax posi­tion. Again care and advice needs to be tak­en before any deci­sions are made.

It is not pos­si­ble for a lim­it­ed com­pa­ny to con­vert into an LLP and there will be a sig­nif­i­cant legal and tax­a­tion impact where an LLP takes over the busi­ness of a com­pa­ny.

Com­pa­nies House pro­vides a use­ful guide to the leg­is­la­tion and back­ground to Lim­it­ed Lia­bil­i­ty Part­ner­ships.

Which businesses might want to use an LLP?

The types of busi­ness that LLPs were orig­i­nal­ly designed for were pro­fes­sion­al part­ner­ships such as lawyers, sur­vey­ors and accoun­tants. In many of these cas­es, though not all, they had his­tor­i­cal­ly not been able to oper­ate through lim­it­ed com­pa­nies because of restric­tions from their pro­fes­sion­al asso­ci­a­tions and the option of using an LLP offers some advan­tages.

How­ev­er oth­er busi­ness­es may also ben­e­fit from using LLPs, par­tic­u­lar­ly new start-ups who might oth­er­wise have formed lim­it­ed com­pa­nies.

What liability might members of an LLP have if something goes wrong?

Because LLPs are rel­a­tive­ly new com­pared to oth­er forms of busi­ness­es, there are no deci­sions yet by the courts where some­thing has gone wrong. This is there­fore a hard ques­tion to answer but it looks as if the fol­low­ing describes the posi­tion as most peo­ple under­stand it at present:

• If, for exam­ple, a mem­ber of an LLP were to give bad advice to a client and the client suf­fered a loss as a result, the client may be able to take the LLP to court and be award­ed appro­pri­ate com­pen­sa­tion.
• In cer­tain cir­cum­stances it could be pos­si­ble that the mem­ber who actu­al­ly gave the advice may also be required by a court to pay com­pen­sa­tion to the client.
• It is how­ev­er prob­a­ble that any oth­er mem­bers who were not direct­ly involved in the advice will not have any per­son­al lia­bil­i­ty. In a nor­mal part­ner­ship it is quite pos­si­ble that they would have had a per­son­al lia­bil­i­ty.

It will still be essen­tial for LLPs (and indi­vid­ual mem­bers) who might find them­selves in this posi­tion to have suit­able insur­ance cov­er.

The oth­er area that needs to be con­sid­ered is to do with what the law calls unlaw­ful or insol­vent trad­ing. In just the same way as com­pa­ny direc­tors can be pros­e­cut­ed for these offences, mem­bers of an LLP can also be pros­e­cut­ed (and can be dis­qual­i­fied from being a mem­ber of an LLP in the future).

A decision to use an LLP?

Any deci­sion to con­vert an exist­ing part­ner­ship or to set up a new busi­ness using an LLP is a com­plex one, involv­ing legal, account­ing and tax issues.

Tax treatment for certain LLP members

The LLP is a unique enti­ty as it com­bines lim­it­ed lia­bil­i­ty for its mem­bers with the tax treat­ment of a tra­di­tion­al part­ner­ship. Indi­vid­ual mem­bers can be deemed to be self-employed and taxed on their respec­tive prof­it shares.

How­ev­er, deemed self-employed sta­tus is not auto­mat­ic for all mem­bers. For exam­ple, indi­vid­u­als who would nor­mal­ly be regard­ed as employ­ees in high-salaried pro­fes­sion­al areas such as the legal and finan­cial ser­vices sec­tors orig­i­nal­ly ben­e­fit­ed from self-employed sta­tus for tax pur­pos­es which result­ed in a loss of employ­ment tax­es payable. As a result the tax treat­ment of cer­tain LLP mem­bers was changed so that their tax­es are paid under PAYE.

The rules apply when an indi­vid­ual is a mem­ber of an LLP and three con­di­tions are met. The con­di­tions are:

• There are arrange­ments in place under which the indi­vid­ual is to per­form ser­vices for the LLP, in their capac­i­ty as a mem­ber, and it would be rea­son­able to expect that the amounts payable by the LLP in respect of their per­for­mance of those ser­vices will be whol­ly, or sub­stan­tial­ly whol­ly, dis­guised salary. An amount is dis­guised salary if it is fixed or, if is vari­able, it is var­ied with­out ref­er­ence to the over­all prof­its of the LLP.
• The mutu­al rights and duties of the mem­bers and the LLP and its mem­bers do not give the indi­vid­ual sig­nif­i­cant influ­ence over the affairs of the LLP.
• The individual’s con­tri­bu­tion to the LLP is less than 25% of the dis­guised salary. The individual’s con­tri­bu­tion is defined (broad­ly) as the amount of cap­i­tal which they con­tributed to the LLP.