Limited Liability Partnerships

At AHACCOUNTANTS, we can help businesses in the Nottingham area determine if an LLP structure is the right fit for their needs. Here’s an overview of the key features of Limited Liability Partnerships.

Key Features of LLPs

One of the primary advantages of an LLP over a traditional partnership is that its members (not called partners) can limit their personal liability, similar to shareholders in a company. However, lenders, such as banks, may still require personal guarantees from the members, as they typically do from company directors and shareholders.

In the past, business owners seeking to limit personal liability usually established companies, which are subject to corporation tax on profits. Shareholders could then receive dividends as personal income. In contrast, LLP profits are treated as personal income for members, akin to a partnership structure. It’s essential to note that taxation should not be the sole factor in choosing a business vehicle. Certain LLP members may be taxed as employees under specific circumstances (see Tax Treatment for Certain LLP Members). We would be pleased to discuss the implications of this in your specific case.

LLPs must produce and publish financial accounts similar to those of limited companies, including submitting accounts and an annual return to the Registrar of Companies. This requirement is more stringent than for non-incorporated partnerships, and specific accounting rules may lead to different profit reporting than a typical partnership. The filing deadline for accounts is nine months after the period’s end. Companies House offers a helpful guide to the requirements for LLP accounts.

Setting Up LLPs or Converting Existing Partnerships

Establishing an LLP involves a legal incorporation process, which includes submitting specific documents and fees to the Registrar of Companies. Although not legally required, every LLP should have a comprehensive members’ agreement in place. Seeking legal or professional advice to cover relevant issues in this agreement is highly recommended. Without a members’ agreement, the law makes certain assumptions about the LLP that may not align with the members’ intentions in the event of a dispute.

Existing partnerships can convert to LLPs through the same incorporation process, and if membership and operational aspects remain unchanged, there may be no impact on the partnership’s tax position. Careful consideration and advice are crucial before making such decisions.

Please note that a limited company cannot convert into an LLP, and significant legal and tax implications arise if an LLP takes over a company’s business.

Companies House provides useful guidance on the legislation and background of Limited Liability Partnerships.

Who Might Benefit from an LLP?

LLPs were originally designed for professional partnerships, such as lawyers, surveyors, and accountants, who often cannot operate through limited companies due to professional association restrictions. However, other businesses, especially startups, may also find LLPs advantageous.

Liability of LLP Members

As LLPs are relatively new, there are currently no established court decisions regarding liability in case of issues arising. Here’s an overview of the current understanding:

• If a member provides bad advice leading to client losses, the LLP may be held liable in court for compensation.
• The member who gave the advice may also be personally required to pay compensation.
• Other members not directly involved typically will not have personal liability, unlike in a traditional partnership.

It is crucial for LLPs and their members to maintain suitable insurance coverage for protection.

Another area of consideration involves unlawful or insolvent trading. Just as company directors can face prosecution for such actions, LLP members can also be prosecuted and potentially disqualified from membership.

Making the Decision to Use an LLP

Choosing to convert an existing partnership or establish a new LLP is a complex decision involving legal, accounting, and tax considerations.

Tax Treatment for Certain LLP Members

The LLP structure uniquely combines limited liability with the tax treatment of traditional partnerships. Individual members are typically considered self-employed and taxed on their respective profit shares.

However, deemed self-employment is not automatic for all members. For instance, members in high-salaried professional sectors (like legal and financial services) previously benefited from self-employed status for tax purposes. Changes to the tax treatment now require taxes for certain members to be paid under PAYE if specific conditions are met:

1. Arrangements exist for the individual to perform services for the LLP in their capacity as a member, with reasonable expectations that their payment will be primarily disguised salary (fixed or variable without reference to overall profits).
2. The mutual rights and duties of the members do not provide the individual with significant influence over the LLP’s affairs.
3. The individual’s contribution to the LLP is less than 25% of the disguised salary, broadly defined as their capital contribution.