Limited Liability Partnerships

LIMITED LIABILITY PARTNERSHIPS (“LLPs”)

Introduction

A new form of business entity has been created recently in the United Kingdom ("UK") the Limited Liability Partnership. Such entities have existed for many years in other jurisdictions.

The LLP is a suitable vehicle for people wanting the benefit of limited liability with the flexibility and tax benefits of a partnership. The tax benefits are greatest where retention of profits within the LLP is not important. LLPs can therefore be attractive to inter alia professional partnerships, property developers and investors, securities and futures firms and film production companies.

Benefits of LLPs

LLPs offer a number of significant benefits including:

Generally having limited liability.

Any claim against the LLP is restricted to its assets and excludes members’ personal assets outside the LLP, although it is still possible for a member to be sued personally for negligence. Unlike general partnerships where partners are jointly and severally liable for the debts of the partnership in a winding-up (and could lose all their personal assets in an ‘Armageddon’ situation), the liability of members in an LLP who are not guilty of wrongful trading is limited to the extent of their funds in the LLP (see Insolvency and winding-up below).
Being a body corporate in their own right.

Unlike general partnerships, LLPs are capable of entering into contracts (including for land) in their own right and generally have unlimited contractual capacity. The Articles of Association can limit the capacity of limited companies. LLPs can issue debentures and grant fixed or floating charges over their assets.
Normally being tax transparent.

LLPs are taxed as a partnership. Profit shares are taxed at the marginal rate of each member. VAT is not charged on profit distributions; nor are they taxed as dividends. Drawings are not subject to employers’ national insurance contributions (currently 11.8%). Members can access loss relief without needing to comply with the corporation tax rules for group relief or consortium relief, although there are some restrictions on how these losses can be utilised. Also there will be no capital gains tax on changes in profit share and new members can normally join without any adverse tax consequences.
Having unrestricted membership.

Members can be individuals, limited companies or trustees, resident in the UK or abroad and are not restricted to 20 in number (as are many general partnerships).
Having organisational flexibility.

LLPs have the organisational flexibility of a partnership including changes to membership. LLP members are free to define their relationship in the members’ agreement, which does not need to be made publicly available.
No benefit-in-kind.

Members of an LLP are not subject to the benefit-in-kind provisions applying to limited companies. Hence, company cars are not subject to the scale charge.

Downsides of LLPs

The main downsides of being an LLP rather than a general partnership include:

Having information on public record.

Registration at Companies House, including details of the names and home addresses of members (although a Confidentiality Order to prevent home addresses appearing on Companies House records can be obtained in exceptional circumstances).
Having to file accounts.

Accounts have to be true and fair and be filed at Companies House. The same disclosure requirements and late filing penalties apply to a LLP as would apply to an equivalent private limited company. Small and medium sized LLPs can currently file abbreviated accounts.
Being subject to audit.

The accounts are also subject to the same audit requirements as equivalent private limited companies. Very small LLPs can take advantage of the audit exemption provisions.
Possible need for personal guarantees.

In view of the limited liability status, lenders and landlords may seek personal guarantees from members.

The main downsides of being a LLP rather than a limited company include:

Higher taxation of retained profits.

Profits retained in the LLP are still taxed at the member’s marginal rates of tax (currently up to a maximum of 40%) whereas undistributed profits in a limited company will generally be taxed at rates of between 19% and 30%.
Higher costs of incorporation.

Currently there are no “off-the-shelf” members agreements so each agreement has to be bespoke, unlike limited companies that can adopt standard Articles of Association on incorporation. Consequently it will also take longer and cost more to incorporate as a LLP rather than as a limited company.

Accounting and Audit

As stated above all accounting and audit requirements are similar to those of an equivalent limited company. A Statement of Recommend Practice sets out the format of LLP accounts and how various items are to be treated. The main differences compared to limited companies are:

Optional Members’ Report.

A Members’ Report (equivalent to the Directors Report) is optional but an LLP’s Annual Report should:

- disclose the principal activities of the LLP
- give an indication of existence of branches outside the UK
- identify those who acted as designated members during the year

Abbreviated accounts of small LLPs filed at Companies House will not need to contain this information
Members’ remuneration and interests.

The profit and loss account requires disclosure of profit or loss for the financial year before members’ remuneration and profit share from which salaried members’ remuneration should be deducted before arriving at profit or loss for the financial year available for division among members. The status of loans from members in relation to a winding up also needs to be disclosed.

Abbreviated accounts of small LLPs filed at Companies House will not contain a profit and loss account
Retirements benefits.

When a member retires the present value of the best estimate of the expected liability for future payments should be provided in the accounts. Where future payments are profit dependent, it will be necessary to make a best estimate of future profit levels.

Any amounts set aside during a members’ period of service to provide for post retirements benefits should be included in loans to members. The notes should disclose the policy on provisions for retirement benefits and state the basis for the charge shown in the profit and loss account.
Taxation

Where tax payable on member’s remuneration is a personal liability of the members, it should be shown within members’ interests on the balance sheet and not included in the profit and loss account.

Where consolidated accounts are prepared incorporating subsidiary companies, the tax charge for these companies will be disclosed in the consolidated profit and loss account.
Stock and WIP

The cost of members’ time will only include those elements that would be expensed in the Profit and Loss Account. Any overhead related to Members’ time should be included in the value of stock or WIP.

Taxation

As stated above, LLPs will normally be taxed as though they were partnerships.

Insolvency and winding up

Most of the insolvency and winding up procedures for companies will apply to LLPs. There is a “clawback” provision, which means that a member has to repay any withdrawals made in the 2 years prior to winding up, subject to the discretion of the court. This will only occur in the event that the member knew or ought to have concluded that, after the withdrawal, there was no reasonable prospect that the LLP would avoid going into insolvent liquidation.

Transition from an existing partnership to an LLP

Generally the transfer of assets from an existing partnership to an LLP will be tax neutral. No stamp duty will be payable on any transfer of property from existing partnerships to a newly incorporated LLP provided members and their interests in each partnership are the same.

If an existing partnership changes to a LLP, the LLP will have to apply for VAT registration and the normal transfer of a going concern rules will apply.

Where existing undertakings are transferred into a LLP the transfer should be accounted for as a group reconstruction. Merger accounting can generally be used.

Designated Members

LLPs will be required to appoint at least two designated members who will be responsible for a number of duties involved in the running of the LLP.

The above information is general in nature and is subject to changes in legislation and regulation. It is provided without acceptance by Bond Partners LLP of any responsibility whatsoever, and any use you wish to make of it is, therefore at your own risk.