Transparency of tax heads the appeal of LLPs

Apr 30, 2007

MORE and more professional service firms are converting to LLP status due to the limited liability afforded to members. The added protection can help to attract the best people to the business while Professional Indemnity Insurance ensures that clients receive the same high level of protection.

Conversion can prove to be a win:win situation all round, but it is essential that firms consider it thoroughly as it can involve significant legal and tax implications.

What are the key features of a Limited Liability Partnership?

A Limited Liability Partnership has a separate legal identity, unlike a general partnership. It can contract on its own behalf with third parties and with its own members. The members collectively will have the protection of limited liability.

The LLP will be treated as a partnership for tax purposes on the same terms as traditional partnerships. However, it has an obligation to maintain accounting records on the same basis as a private limited company.

The LLP must comply with Generally Accepted Accounting Principles but must also comply with the full panoply of Statements of Standard Accounting Practice , Financial Reporting Standards and the Statement of Recommended Practice.

The LLP regulations require disclosure of profit attributable to the member with the largest profit entitlement – the identity of this member need not be disclosed.

The annual accounts will be signed on behalf of the members by a designated member. The designated members of the LLP are liable to the same civil penalty provisions as apply to private limited companies with regard to filing and time limits.

It is vital that every LLP draws up a members’ agreement. This agreement should cover arrangements between the members themselves and between the LLP and its members.

What are the tax consequences?

Broadly, conversion from a ‘normal’ partnership to a LLP is tax-neutral. There is no cessation of business for income tax purposes, no disposal for capital gains tax purposes, and the business is treated as continuous for the purposes of inheritance tax business property relief.

Members are treated as self employed partners for income tax and national insurance purposes, and are taxed on their share of the profit as per the partnership tax return, whether or not these are actually remitted.
Regarding pension contributions, members’ profit share remains treated as earned income and therefore eligible for pension contributions to be made against it.

Income tax relief continues to be available for the interest cost of debts taken out to finance a member’s capital account.

If the LLP is unfortunate enough to make a loss, a member’s tax relief is limited to the amount of capital invested in the partnership. If there is an excess loss over and above this, it is only able to be carried forward against future profit shares.

The combination of tax transparency with the availability of limited liability for members makes LLPs attractive not only to the professions but also to a wide range of other businesses.

For more information, visit www.bakertilly.co.uk

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