What is an LLP?
An LLP is a form of legal business entity with limited liability for the members.
When to choose an LLP
An LLP is a great alternate structure for any business that currently operates as a traditional partnership with a small and consistent number of members who each make comparable contributions and draw similar profits. An LLP is also particularly beneficial if the business activities involve high-risk services or there is a likelihood that claims for damages could be brought against the business. Furthermore, the flexibility offered from a partnership structure is often the determining factor for certain professions. LLPs are usually not chosen for any tax benefits.
What is the difference between an LLP and a limited company?
The main difference is that an LLP has the organisational flexibility of a partnership and is taxed as a partnership. In other respects, it is very similar to a private company.
* Must be set up as a profit-making business – cannot be used for non-profit enterprises or charities.
* Must have at least two members/partners (these could be individuals and companies/firms) at all times. It is possible to form an LLP with just one natural person and set up a dormant company as a second member.
* At least two partners have to be designated members (see below).
* There are no shares, shareholders or directors in an LLP.
* Must have a registered office address in the country of incorporation.
* LLPs do not pay Corporation Tax – each LLP member is taxed as self-employed through Self Assessment.
* Annual accounts and annual returns must be delivered to Companies House each year.
* Limit of each LLP member’s liability is agreed between the members and usually stated in a partnership agreement.
* A partnership agreement is often drawn up to outline the rights, responsibilities and liability of each member, and specify the way in which the LLP should be managed.
* Flexible internal structure that can be changed at any time, as often as required.
* LLPs do not have shares to sell and therefore cannot receive capital investment in exchange for a portion of ownership of the business from non-LLP members.
What are ‘designated’ members?
An LLP must formally appoint at least two of its partners as ‘designated members’. With the agreement of the other members, a member may become a designated member at any time. Designated members have the same rights and duties towards the LLP as any other member. These individuals will take on additional administrative and managerial responsibilities on behalf of the LLP and all other members. These duties will include:
* Preparing and filing annual returns and annual accounts;
* Registering the partnership for Self Assessment;
* Registering the partnership for VAT, if applicable;
* Reporting changes to Companies House and HMRC;
* Maintaining accounting records;
* Appointing an accountant or auditor;
* Representing the LLP in any legal proceedings or if the business is dissolved;
* Ensuring the LLP and its members adhere to all forms of statutory compliance;
* If there are fewer than two designated members, then every member is deemed to be a designated member.
How is an LLP taxed?
LLPs have to file a partnership tax return (SA800), but don’t pay Corporation Tax. LLP members are taxed individually and required to register with HMRC for Self Assessment, file their own tax returns and pay Income Tax and Class 4 NIC on their own taxable profits.
Salaried LLP members
As from 6 April 2014, salaried LLP members must be treated as ‘employees’ for tax and NI purposes if all three of the following conditions are met:
* The member has no significant influence over the affairs of the LLP;
* It is reasonable to expect that at least 80 per cent of the member’s pay is fixed, or income that is variable, but not affected by the LLP’s overall profits or losses (i.e. disguised salary);
* The member’s capital contribution to the LLP is less than 25% of the disguised salary.
Where these rules apply, LLPs are required to pay members’ salaries and NIC through PAYE.
Mixed Partnerships – Tax implications
* If the members of the LLP are individuals as well as their limited companies, then any profit split to the company relating to work done by the individual is taxed with the individual; it is irrelevant that the individual has done the work as the director of his company, since this is not an arm’s length transaction.
* The mixed membership partnership legislation looks at whether the work involves any member other than that corporate member.
* If the profit allocated to the non-individual member exceeds an appropriate notional profit AND the individual has the power to enjoy the profits distributed to the company (even if they choose not to), the profit distribution is taxed with the individual. This includes the situation where the individual and the non-individual are connected persons. If an individual, taken together with their connected persons (which includes a fairly wide group of relatives), has control of the company, then the individual and the company are connected persons.
* See this HMRC link for more information.
If an individual partner withdrew from the partnership to prevent the mixed membership rules from applying then he would continue to be taxed as a partner, with the excess allocation to the company then being treated as his profit share (and chargeable to income tax). See examples 15 to 18 in the HMRC link.
LLP’s with only limited companies as members
* Legal: This is allowed, the only requirement is that an LLP has at least two members.
* Tax: IR35 could be a problem, because the director of the limited company is doing work for the LLP through an intermediary. If you fall inside of IR35 then the director of the limited company is taxed as a salaried employee.
For more information on LLPs you can visit HRMC.