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The LLP alternative

Structuring a business as a Limited Liability Partnership can carry significant tax advantages, and is worthy of consideration by entrepreneurs

The LLP alternative

Limited Liability Partnerships (LLPs) were introduced in 2001 by the then Labour government as an alternative business structure to the Limited Liability Company and the traditional form of unlimited liability partnership. However, despite their relative maturity on the statue book, LLPs are all too often overlooked as a business structure of choice by the majority of entrepreneurs. There may be a number of reasons for this – tradition, a general familiarity with companies and their administration, perceived financing barriers and profit sheltering issues among them – but a proper critical analysis is often not entered into or even considered.

Tax advantages

There can be a number of advantages to using an LLP as the preferred business structure:

  • Because partnerships, including LLPs, are treated as transparent for tax purposes, an LLP’s profits are only taxed once – in the hands of the owners. With companies, profits are taxed twice – at the company level and again when the profits are distributed to the owners. This double taxation can be penal.
  • Ownership interests or partnership shares can be more flexibly moved between equity members without the risk of incurring unpleasant employment tax, National Insurance or Capital Gains Tax charges. This means that equity members can usually be introduced and/or leave without significant tax charges arising – something usually much more difficult to achieve with companies and shareholdings.
  • PAYE and Class 1 NICs (for employers) can usually be avoided by genuine equity members.
  • Equity partner expenses can be more generously allowed and policed within an LLP structure compared with the more restrictive rules for the deduction of expenses by employees.
  • There are no car, car fuel or other benefit charges for equity members.
  • Profit periods can be selected so as to maximise or defer tax cash flows.
  • Early-stage trading losses can be relieved against personal income and carried back to earlier (and sometimes higher rate) tax years.

Structural considerations

That said, a straightforward LLP will not be best for all businesses. Some further creativity may be required. For instance:

  • High-tech businesses may prefer the involvement of a limited liability company so as to be able to benefit from the generous research and development tax credit scheme. However, companies can often be admitted as members into an LLP structure so as to claim the R&D tax credits as required, and still benefit from the other tax advantages of an LLP.
  • More profitable businesses may prefer to retain their profits within their business and at the same time avoid the highest rates of Income Tax (currently 45%). A limited company introduced as a corporate member with an entitlement to the bulk of the LLP’s income profits, or as a related service company, may provide a solution here.
  • Capital-intensive businesses may need to invest significant sums in new plant and machinery, and they can unwittingly forfeit claims of 100% annual investment allowance on up to £250,000 of annual qualifying expenditure. Mixed corporate and LLP structures will not qualify for the 100% deduction.

As always there are several financial, commercial and legal aspects to consider; but thinking carefully about the most appropriate business structure, whether a new or existing venture, may also add value.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.