How are llps taxed
Dispelling some of the myths
You can only have an LLP if it is converted from a partnership
False. A new LLP can be incorporated by Companies House in a similar way to a new company. This is usually easier to set up than a limited company because there are no shares to allocate or Statutory Articles to be drafted. It should be noted that an LLP will instead usually have a Members’ Agreement, drafted by a lawyer, setting out how the LLP will operate.
Profits are taxed at a higher rate through an LLP
Whilst the headline income tax rates may be somewhat higher than the decreasing corporate tax rate, when effective rates of tax on the extraction of cash are considered, rates for individuals who are members of an LLP (paying tax at the highest rates) are similar to company directors receiving dividends or bonuses.
Companies are increasingly converting to an LLP status to save on the 13.8% employers National Insurance liability. Where those individuals have high car benefit charges, further savings are often possible. Unlike PAYE, which is reported and paid monthly, profits of an LLP can be reported and taxed up to 21 months after the end of the accounting period, potentially improving cash-flow.
It’s difficult enough getting funding for a limited company; surely obtaining finance for an LLP must be impossible?
Raising finance in the current market is not easy for any business but as LLPs provide some distinct advantages over limited companies their lending criteria can often be very different.
An LLP can borrow money in its own name for use within the business in a similar way to a limited company. Whereas a company may have to provide directors guarantees to a bank, an LLP can provide a personal guarantee of one or more members. Alternatively, a member(s) can borrow the money personally and introduce the funds into the LLP as members’ capital. Encouragingly, there are no legal restrictions on members’ capital being introduced or withdrawn from the business (subject to available funds for the withdrawal) other than as specified within the LLP members’ agreement, and no need to notify Companies House of any change in the capital of the business. Tax
relief may also be available for the individual based on their capital contributions into the business.
Other forms of financing, such as asset based lending and invoice financing, are also available to LLPs just as they are to a company.
If I can’t issue shares, how do I incentivise staff or plan for the future?
An LLP allows a corporate member to be used to provide a method for staff to acquire shares and benefit from the success of the business. A corporate member would receive a profit share and (post tax) this could be distributed to the employee-shareholders via dividends, in much the same way as employees hold shares in a limited company share scheme.
LLPs are increasingly used to enable better succession planning. By encouraging senior employees to “buy-in” and become members of the LLP, this promotes ownership and staff loyalty at minimal cost.
An LLP cannot take advantage of the research and development or patent box incentives
Whilst both incentives are aimed at limited companies, with advance consideration it is possible for an LLP with a corporate member to take advantage of these favourable tax rules. The key restriction on the use of the incentives is that they are only available on the share of relevant income/profits allocated to the corporate partner and hence are taxed under corporation tax rules. In these circumstances, careful wording of the LLP agreement is required to clearly define the profits due to the corporate member.
LLPs are unknown, used for tax avoidance purposes and are not a “trusted business structure”
When LLPs were introduced, the legislation was piggy backed onto the limited company legislation, creating regulation and anomalies that were too complex and not entirely fit for purpose (such as disclosure of highest paid member earnings). However, the government has recently announced a review of partnerships and LLPs, to consider simplifying the taxation regime and combatting abuse of the rules. Additionally, Baker Tilly is working closely with the Department for Business as part of an on-going initiative looking into the accounting and legal treatment of LLPs.
If you would like to discuss how using an LLP could help your business, then please contact your local Baker Tilly contact.Source: www.bakertilly.co.uk