Other
Limited
Liability Partnerships
What
are they?
From 6 April 2001, there is a business vehicle in addition
to companies, traditional partnerships and sole traders. It
is now possible to run your business using what is known as
a Limited Liability Partnership (LLP).
Most
Important Features of LLPs:
The
key advantage of a LLP compared with a traditional partnership
is that the members of the LLP (it is very important that
they should not be called partners but members) are able to
limit their personal liability if something goes wrong with
the business, in much the same way as shareholders in a company
have always been able to do. Of course anyone lending money
to the LLP such as a bank may still require personal guarantees
from the members, as they frequently do with shareholders
in a company.
Where business owners have wanted to limit their personal
liability in the past, they have normally set up companies
and any profits made by those companies are subject to corporation
tax. Dividends paid by the companies can then be taken as
income of the shareholders. LLPs are taxed quite differently
in that the profits are treated as the personal income of
the members as if they had run their business as a partnership.
The taxation of companies and partnerships is very different
but taxation should not be the main consideration in choosing
a business vehicle. However, we would be very pleased to discuss
the impact of this in any particular case.
LLPs must produce and publish financial accounts with a similar
level of detail to a similar sized limited company and must
submit accounts and an annual return to the Registrar of Companies
each year. This publication requirement is far more demanding
than the position for normal partnerships and specific accounting
rules may lead to different profits from those of a normal
partnership.
Setting
Up LLPs or Converting an Existing Partnership
A
LLP is set up by a legal incorporation process which involves
sending certain documents to the Registrar of Companies (more
details from Companies House at www.companieshouse.gov.uk
or on 0870 3333636) and a fee of £20 from 1 February
2005 (previously £95). Although it is not legally necessary,
every LLP should have a thorough and comprehensive members'
agreement (currently known as a partnership agreement) in
place and needs to have taken legal or professional advice
about the issues that should be covered by this agreement.
Existing partnerships can convert to a LLP by exactly the
same process of incorporation and providing there are no changes
in membership or in the way in which the partnership operates,
there may well be no impact on the partnership’s tax
position. Again care and advice needs to be taken before any
decisions are made.
It is not possible for a limited company to convert into a
LLP and there will be a significant legal and taxation impact
where a LLP takes over the business of a company.
Which
Businesses Might Want to Use a LLP?
The
types of business that LLPs were originally designed for were
professional partnerships such as lawyers, surveyors and accountants.
In many of these cases, though not all, they have not been
able to operate through limited companies because of restrictions
from their professional associations and the option of using
a LLP offers some advantages.
However other businesses may also benefit from using LLPs,
particularly new start-ups who might otherwise have formed
limited companies.
What
Liability Might Members of a LLP Have if Something Goes Wrong?
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Because
LLPs are relatively new, there are no decisions yet
by the courts where something has gone wrong. This is
therefore a hard question to answer but it looks as
if the following describes the position as most people
understand it at present:
- if,
for example, a member of a LLP were to give bad advice
to a client and the client suffered a loss as a result,
the client may be able to take the LLP to court and
be awarded appropriate compensation
- it
is possible that the member who actually gave the
advice may also be required by a court to pay compensation
to the client
- it
is however probable that any other members who were
not directly involved in the advice will not have
any personal liability. In a normal partnership it
is quite possible that they would have had a personal
liability.
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It
will still be essential for LLPs (and individual members)
who might find themselves in this position to have suitable
insurance cover.
The other area that needs to be considered is to do with what
the law calls unlawful or insolvent trading. In just the same
way as company directors can be prosecuted for these offences,
members of a LLP can also be prosecuted (and can be disqualified
from being a member of a LLP in the future).
A
Decision to Use a LLP?
Relatively
few LLPs have been created so far, partly because they are
new and partly because there are doubts as to what the detailed
impact may be. There is an expectation that they will eventually
become widespread but any decision to convert an existing
partnership or to set up a new business using a LLP is a complex
one, involving legal, accounting and tax issues.
How
We Can Help
We
would be delighted to discuss these issues with you and demonstrate
what the impact on your business would be.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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