Principal Benefits of the LLP
When first introduced, the principal benefits of the LLP were the various UK tax advantages afforded to its members.
The LLP has the benefit of being a legal entity with separate legal personality from its members whilst at the same time being fiscally transparent. To date this has resulted in an attractive effective tax rate when compared to LTD companies where tax is suffered at both the corporate level (corporation tax) and shareholder levels (personal income tax).
Members in a LLP are treated as self-employed persons, meaning that, amongst other things, an employer’s national insurance contribution saving of 12.8% per annum could be achieved. Additionally, membership benefits could be given to new members without attracting a tax charge due to employment. Other non-tax benefits contributed to the appeal of LLPs one of which is the is the flexibility in profit sharing arrangements. This differs to a LTD, where, if a dividend is declared in respect of a share class, it must be declared for the entire class; one cannot be selective within a class. It is also easier to re-allocate profit year on year, and, providing the terms of the membership agreement allow, often easier to remove members of a LLP as opposed to removing employees in a LTD. LLP membership agreements, unlike a LTD’s Articles of Association are not in the Public Domain and remain private documents.
As a consequence of subsequent legislative changes however, some of the benefits of using a LLP have become more difficult to achieve. Salaried Members Rules have resulted in certain members being treated as employees for tax purposes, extinguishing one of the key tax savings associated with LLPs.
Structures comprising corporate and individual partners are now affected by new rules limiting the amount of profits that can be allocated to the corporate members of a LLP. This was previously a method whereby profits could be deferred in a tax-efficient manner.
While the attraction of the LLP could be considered to have been diminished somewhat, the appeal of the LTD can be said in many respects to be increasing. Of particular note are comments made following the vote for the UK to leave the EU on July 23, 2016, where the then UK Chancellor gave strong indications that potential cuts to the rate of UK corporation tax, to potentially less than 15 percent, would likely be at the heart of the UK’s efforts to attract investment in post-Brexit Britain.
Principal Benefits of the LTD
A cut in the rate of UK corporation tax to less than 15 percent as indicated might happen, could make the effective tax rate for LTD structures lower than the 47 percent effective rate generally associated with a LLP structure. Further tax benefits for LTDs could possibly follow in the coming years to encourage foreign investment into the UK.
There are further benefits to the LTD that were sometimes overshadowed by the benefits of using a LLP. When compared to the LLP, such benefits of a LTD could include the LTD offering greater flexibility in terms of incentives made to employees and/or business exit strategies; and, the ability to retain profits within the LTD, perhaps to meet regulatory capital requirements, or as working capital for the business; and, depending on the investment strategy employed by the manager and the related need for proprietary software and intangibles, the ability to secure UK tax reliefs for expenditure on research and development. It also affords the business the ability to pay a dividend or not to different classes of shareholders.
Switching
For anyone considering the conversion of their LLP to LTD status, there are a number of matters to consider. The process typically involves, the incorporation of a new company; the transfer of the LLP’s business to that company; and the termination of trading the LLP. In addition to this, each asset of the LLP (including suppliers, employees, finance agreements and leases) needs to be transferred and the contracts assigned or novated. Whilst this can be a significant task it might be that the LLP simply needs to take a share in the new LTD, remain in existence itself and gradually transfer its business, employees and assets; the options are endless.
There may be tax implications in the way of VAT arising from the transfer of assets though correctly handled this should be minimal. It is possible that a capital gains issue may arise but again, this should be minimal if correctly handled.
Choosing the right Option
Whether to trade by way of LTD or LLC can be a borderline decision in terms of ongoing tax and other ongoing liabilities. In every case it is essential to carry out a detailed comparison of the two in relation to the specific business and the persons involved. Only then can a knowledgeable decision be made. What may surprise most is that, very often, the best option is to trade with a combination structure involving both LTD and LLC. Turner Little will be pleased to advise you as the full range of options.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
