Chartered Accountants and Professional Business Advisers

« More stories from Shipshape November 2017

LLP or Ltd - which is best for you?

There are a number of factors to take into consideration when you’re thinking about how to structure your business to limit your liability. Here’s our quick guide comparing limited liability partnerships (LLP) with limited companies (Ltd).

Both LLPs and limited companies are legal entities in their own right, capable of entering into contracts and holding the title to assets. Companies House filing is required within nine months of period end for LLPs and private companies and six months for a plc. Accounts will require an audit unless it is a small or dormant company or LLP. In general no exemption from audit is available for an FSA regulated entity.

Abbreviated accounts can be prepared and filed at Companies House provided the LLP or limited company meets the relevant requirements.

 

LLP

Ltd

Potential liability of owners

Each member’s liability is restricted to their formal capital and certain unallocated profits on winding up, except that they have a oint and several liability for stamp duty land tax.

Shareholders’ liability is restricted to any outstanding calls on share capital on winding up.

Risk protection

Members have protection under tort and contract law. A member might still be liable for his own negligence

Shareholders have protection under tort and contract law. A director might still be liable for his own negligence.

Registration

Governed by members’ agreement, which is a private document and will not be filed at Companies House. Partners in the LLP are called members. At least two must be designated members who have additional legal and other duties. All members must be registered at Companies House.

Governed by The Memorandum and Articles of Association, which must be filed at Companies House. All directors must be registered at Companies House.

Minimum capital

None. Members can fund the business with debentures or unsecured loans ranking equally with other unsecured creditors.

Can be as little as one penny issued and paid up for a private company. Plcs must have at least £50,000 share capital with at least 25% paid up.

Employment rights

Members’ only rights are those given in a members’ agreement.

Directors are generally employees, protected by employment law.

Incentives and rewards

Promotion to membership for high flyers. Bonus paid via profit share is taxed at up to 47%. Members retain control via members’ agreement.

Bonuses subject to income tax and NIC at up to 47% also attract employers’ NIC at 13.8%. Share option schemes are complex and costly to administer.

Retirement issues

Members can decide to ascribe no value to the LLP’s goodwill, so a retiring member takes only his capital, loan and current account balances. Avoids costly valuation exercises whenever members eave.

Retirement bonuses to retiring directors may be costly in tax terms. There must be a formal share valuation agreed with HMRC if a director sells his shares on retiring (or at any time).

Sale process

Buyers prefer to buy business assets because of reduced due diligence and less reliance on sellers’ warranties and indemnities. Normally relatively low transaction costs.

Shareholders prefer to sell a company to avoid duplicate tax cost (see below). Greater due diligence, warranties and indemnities risk for sellers. Normally relatively high transaction costs.

Tax on profits

The LLP is transparent. Members are taxed on all profits, save that anti-avoidance legislation can result in certain members on fixed shares being treated as deemed employees.

Corporation tax at 19%
Tax on owners' incomes

Self-employed top rate is normally 47% including NIC. Except if the member is a deemed employee, tax liabilities are personal; if a member defaults there is no come back on the LLP or the other members.

Employees’ top rate is 47% including NIC. But company suffers 13.8% employer’s NIC on all remuneration. Dividends escape all NICs but are taxed at up to 38.1%. Must pay over PAYE and NIC.

Tax on sale

Members can sell business assets and are taxed personally on gain at 10% or 20%, subject to possible entrepreneurs’ relief. The LLP will not be liable for any tax.

Gains from selling share capital are taxed at 10% or 20%, subject to possible entrepreneurs’ relief. Sale of business assets by the company results in tax of 19% of the gain for the company, but with the acquisition cost adjusted for inflation. There is further tax on extraction of the net gain from the company.

Inheritance tax

Business property relief at 50% or 100% may apply to an interest in an LLP’s assets.

Business property relief at 50% or 100% may apply to shares in a limited company.

FCA considerations

Regulatory capital rules probably mean an FCA member LLP must have some formal capital, use of subordinated loans from members, but Tier 2:Tier 1 ratio restriction and all earnings of members are excluded from annual expenditure calculation.

Paid up capital will be dictated by FCA capital requirements and only discretionary bonuses are excluded from annual expenditure calculation.