Limited Liability Partnerships (LLP) – this could improve your retirement and tax planning

We have had a number of enquiries recently from business owners considering setting up an LLP.

There are numerous advantages in setting up an LLP particularly if you also own a Ltd company. It is essential to ensure that you obtain professional advice from an experienced and capable practitioner.

I have recently been made aware of a particularly disastrous example of how not to set up an LLP – with dire consequences for the partners.

I trust however that the following précis of the main features of an LLP will provide a useful outline for you. One of the main benefits of forming a Limited Liability Partnership (LLP) is the potential for tax savings and additional tax flexibility.

It is possible that you could only pay 10% tax on your business exit, after selling goodwill to limited company. In addition you can deduct the cost of buying this goodwill from taxable profits in your limited company.

The combined effect of the two points above could mean a tax saving £400k on a business worth £1m.

An LLP is useful as it can pay for company cars tax efficiently.

Losses can be used to offset partners’ personal income to create tax refunds (note that this limited to £25k per partner if they work less than 10 hours a week in the LLP).

Setting up an LLP does not affect the corporation tax rate that is paid by any limited company that you control.

In a loss making business, partners can take drawings out without triggering PAYE/NIC or any personal tax (dividends can’t normally be paid out of loss making limited companies).

Partners can have overdrawn loan accounts with the LLP with triggering tax liability.

For Scottish registered LLPs only, loans can be made to the LLP from limited companies controlled by its partners without the 25% “s419c” tax arising.

Minority owners and Entrepreneurs’ Relief: with LLPs, there is no requirement to have a 5% minimum shareholding/voting right (as is the case for limited company shareholders).

Commercial benefits:

It has a separate identity to your limited company businesses, as far as customers are concerned, including separate accounts and internal management structure and ownership. You can allocate profits shares to partners in a completely flexible way without being tied to shareholding percentage ages etc

The main disadvantages are:

The additional administration of running another business. Your profit share will be taxed at marginal rates of tax (ie 40% or 50%) That in an LLP a partner is taxed on their share of the profit earned and not the profit extracted from the business.

You will not get tax relief on the purchase of qualifying goodwill in other businesses.

You will not get enhanced tax relief on R&D expenditure.

Contact one of our Financial Planning Consultants if you require advice on the setting up of an LLP or any other issues relating to managing change in business.

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