Limited Liability Partnerships Corporate Partners A Commercial and Tax Opportunity?
Andrew Maidstone of Charnwood Accountants and Business Advisers LLP suggests how an LLP structure may make not just commercial sense for your business, but also offer potential tax savings.
Professional firms such as recruitment businesses, architects, solicitors and accountants have traditionally operated as conventional partnerships.
Whilst such arrangements have often aided succession planning and confidentiality, the partners have suffered relatively high levels of taxation and of course been jointly and severally liable in respect of each others' actions.
As a result many firms have therefore over recent years transferred their businesses to limited liability companies to remove the joint and several liability and potentially enjoy lower rates of tax.
However, at Charnwood Accountants and Business Advisers LLP we have been actively involved in tailoring more specific structures to client circumstances often involving the use of Limited Liability Partnerships (LLPs) and possibly with those LLPs having companies as their partners or 'members'. (Corporate partners.)
There are numerous benefits from arranging the business structure in this way:
- Limited liability both in terms of the LLP but also with the partners being limited companies
- The ability to generate substantial tax efficient directors' loan accounts in favour of the partners on the transfer of partnership interests to the limited companies
- More tax efficient succession management for the introduction and retirement of partners
- The taxation of profits at lower corporate, rather than personal income, tax rates
In these modern, extremely litigious and economically difficult times, it is essential in our view that businesses enjoy as much limited liability as possible. Most businesses carry insurance such as professional indemnity insurance but having the additional benefit of limitation of liability simply by applying an appropriate operating structure does provide added piece of mind. If the insurance policy does not cover a situation there is still a safeguard.
Directors' loan accounts
When partners transfer their interest in a partnership to a new legal person, for tax purposes they are usually 'selling' their goodwill, albeit potentially to a connected person. Transferring a practice to an LLP can therefore result in a disposal of goodwill and other assets for tax purposes. Provided a number of conditions are met it is likely however, that the partners will qualify for Entrepreneurs Relief and only pay tax on the assets disposed of at 10%. The net effect? The ability to draw amounts from the business in future at rates substantially lower than having to pay higher rates of income tax.
When an employee acquires shares in his/her limited company employer at less than full market value, a benefit in kind tax charge could potentially accrue to that employee. This can therefore make admitting new shareholder directors to a limited company business very inefficient from a tax point of view. However, admitting a new member to an LLP does not have the same tax disadvantages. HM Revenue and Customs do not seek to levy a similar charge on the admission of a new partner, whether that new partner is an individual or a limited company.
Tax on profits
Where the partners in an LLP are companies rather than individuals, the on-going profits will be taxed at corporate rates (circa 20%) rather than personal income tax rates (potentially as high as 50%). Often this affords very substantial tax savings on an on-going basis.
The benefits outlined are just a small selection of examples of how LLPs can be used to provide substantial commercial and tax savings. There are many other beneficial uses for LLPs. For further information please feel free to contact us. We have had a number of years experience in dealing with these matters and whilst other firms often claim to have had experience in this area, clearly it is important that such a matter is dealt with effectively.
Charnwood Accountants and Business Advisers LLP have a wide range of experience in specialty corporate structuring as well as tax and business advice. RM2 are pleased to recommend their services. For further information on any of the issues raised in this article, please contact Charnwood's on 01509 621833.