Most entrepreneurs forgo the chance to form a limited liability partnership – yet the tax benefits are well worth considering.
Since the introduction of the Limited Liability Partnerships Act 2000, last year the number of limited liability partnerships (LLPs) listed at Companies House passed the 60,000 mark.1
There is a variety of reasons behind the rising popularity of LLPs, although tax-efficiency undoubtedly looms largest in the calculations. Yet entrepreneurs have often been slow on the uptake.
The reasons behind their reticence vary. While holding back due to perceived financial barriers or profit-sheltering issues may make good sense, forgoing the LLP opportunity simply due to a preference for tradition or lack of familiarity could mean missing out on valuable savings.
In fact, there could be numerous tax advantages to structuring your business as an LLP. Some of the most important could be grouped into three areas: Corporation Tax liabilities, equity liabilities, and general trading costs.
Since LLPs are legally counted as partnerships, they are treated as transparent for tax purposes. Whereas company profits are ordinarily taxed twice, via Corporation Tax and Income Tax, LLP profits are only taxed once: in the hands of the owners.
Equity members and partners can enjoy significant benefits from working within the LLP structure. Ownership interests or partnership shares can be more flexibly moved between equity members without the risk of incurring employment tax, National Insurance or Capital Gains Tax charges – it is usually difficult for equity members to join or leave a company without significant tax charges arising. Moreover, PAYE and Class 1 NICs can generally be avoided by genuine equity members, equity partners receive more generous expenses treatment, and equity members do not face car, car fuel or other benefit charges.
The LLP structure also offers a number of trading-related benefits not available via the older, limited company structure. Thus profit periods can be set so as to maximise or defer tax cash flows. Furthermore, early-stage trading losses can be relieved against personal income and carried back to earlier tax years – sometimes to higher rate tax years.
A straightforward LLP will not be best for all businesses. Instead, in some cases, a hybrid solution may offer the optimum outcome.
Hi-tech businesses may want to benefit from the generous research & development tax-credit scheme available to limited liability companies. However, companies can often be admitted as members into an LLP structure that allows them both to claim the R&D tax credits and to benefit from the tax advantages offered by LLP status.
For more profitable businesses that wish to retain their profits within the business while avoiding the top rate of Income Tax (currently 45%), it is possible to remain a limited company but be introduced as a corporate member (or related service company) with an entitlement to the bulk of the LLP’s income profits.
Capital-intensive businesses need to be especially careful if they want to invest large sums in new plants and machinery. Such companies risk unwittingly forfeiting claims of 100% of the annual investment allowance on up to £200,000 of annual qualifying expenditure. It is important for such companies to remember that mixed corporate-LLP structures will not qualify for the 100% deduction.
An LLP is not for all, but for many businesses it can offer significant tax advantages. Company owners with access to expert advice should at least consider their options.
1 Accessed on 30 March 2017: http://www.accountingweb.co.uk/community/industry-update/a-new-lease-of-life-for-llps
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
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