Posted by Simon Misiewicz on 17th July 2013
Have you heard people saying that they are using LLP to their advantage?
Would you like to know the pros and cons of using an LLP?
LLPs are usually used by accountancy or law firms, that have partners who may be concerned about the fact that they have been subject to joint personal liability on matters over which they had little control (1) (3).
LLPs are commercially regarded as ‘bodies corporate’ separate from their members and subject to aspects of company law. To exist, a LLP must be registered. The liability of a member of a LLP for the LLP’s debts is restricted to their capital contribution unless they are negligent in relation to the work carried out for a client (2). A Limited Liability Partnership (LLP) is similar to a normal partnership, but it offers reduced personal responsibility for business debts (4).
Individual partners are required to include their share of any partnership profits in their own returns. The share of profits they enter in their own returns must correspond with the allocations shown in the partnership return (5).
A Limited Liability Partnership (LLP) provides the organisational flexibility of a partnership with the benefit of limited liability for its members. LLPs would normally be taxed as companies because in commercial law, they are bodies corporate. However, special tax rules ensure that, in general
• LLPs are treated as partnerships rather than as corporate bodies
• The income and gains of LLPs are normally taxed on their members as if they were partners in an ordinary partnership (5)
The members of an LLP can agree on an annual basis exactly how the profits of the business are to be divided, meaning profit can be paid and tailored to the individual contributions of the members (7). This is a much simpler process than having a limited company that basis profit share by the shareholders.
A limited liability partnership does not have Directors or a Company Secretary, but it must have at least two designated members who stand as the company’s primary representatives in much the same way as Directors (8).
No PAYE is due and income tax is not payable until 31 January after the end of the tax year. Therefore you could achieve a 20 month cash flow advantage (9).
How are partnerships treated for Capital Gains Tax?
Partnerships (including those carrying on a business as a Limited Liability Partnership) are treated as transparent for Capital Gains Tax. Each partner is responsible for returning any capital gains arising on the disposal of their interests in the assets of the partnership (6).
• LLPs provide flexibility greater than Limited Companies
• LLPs provide greater protection than normal partnerships
• Avoids NICs that would be incurred as a sole trader or as an employee
• Reduced responsibility compared to a director of a Limited Company (7)
• The LLP is not charged corporate tax but the individuals are taxed instead (7)
• Cash flow advantages of paying tax later than being an employee (9)
• Paperwork and administration increases
• Taxes on Limited Companies are circa 20% if not given to the shareholders but LLPs can be charged at the higher tax bracket (10). That said if the profits were extracted in a limited company the shareholders could be taxed up to circa 32.5% or 37.5% for high tax earners. (11) (12)
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Please ensure that you check out our latest webinars and courses Property Accounting & Investment Webinars
(1) IHTM25094 – What Is A Limited Liability Partnership
(2) BIM72110 – Partnerships: Limited Liability Partnership (LLP): An Overview
(3) CG27020 – Partnerships, Limited Partnerships And Limited Liability Partnerships
(4) Type Of Partnership
(5) SAM122001 – Partnership Returns: An Introduction
(6) Partnerships and Capital Gains Tax
(7) LLPs offer IFAs Many Advantages
(8) LLP vs LTD?
(9) Are you missing out On The Advantages Of A Limited Liability Partnership?
(10) What Is An ‘LLP’ And What Tax Advantages Does It Have?
(11) Tax On UK Dividends
(12) Limited Liability Partnerships (LLPs)