LLP vs LTD

CATHERI NE GANNON


What we are covering

What is a LLP
Who is a partner
Admitting new member/shareholder
Tax
Recent changes to the law
Questions



Background to LLPs
Limited liability v unlimited liability
Flexible
Tax

Question:
In anticipation of a client win expensive IT system
installed. Income does not materialise.
What are the implications for the partners?

Who is a partner - significance of the distinction
Generally speaking, the restrictions and duties
imposed on a member are greater than in
respect of an employee.
Employee status
Enforcing post termination restrictions
Who is a partner
No statutory definition
Different for tax
Pointers

Question:
Priscilla receives 100K PA plus benefits.
Is she a partner?
New Member/Shareholder - joiners

LLP - easier to make changes to membership
Dealing with joiners voting, restrictions,
allocation of profits and capital and management
Notice
Power of attorney


New Member/Shareholder - joiners


Question:
Matilda joins the LLP bringing IP which she
enhances during her engagement.
Who owns the IP?

New Member/Shareholder - leavers

Good and bad leavers
Post termination restrictions
Events arising after leaving

Question:
Who owns the goodwill and at what value?

Taxation
Tax on income - LLPs
Tax Transparent
Taxed as self employed
Class 2 and Class 4 NICs
Flexibility regarding profits
Tax on Income - Ltd
Not transparent
Salaries subject to PAYE/NI
Company pays corporation tax
Shareholders pay tax on dividends
NIC class 1 greater than class 2 and class 4
Losses

LTD - can only be used within the company
against certain profits.
LLP - can be set against other taxable income
but with restrictions on the amount allowed to be
set off
LLP losses restricted to higher of 50K and 25%
of taxable income
Profits

LLP flexible in accordance with agreement
Ltd fixed dividend per share

Question:
Fred claims he brought in considerable revenue in
excess of existing contributions.
What can you do?

Tax on Income - Ltd
Not transparent
Salaries subject to PAYE/NI
Company pays corporation tax
Shareholders pay tax on dividends
NIC class 1 greater than class 2 and class 4
Tax on sale - CGT
Rates 28%, 28% or 10%
ER conditions
Officer, director, employee, partner
12 months holding period
5% of the voting shares
No 5% requirement for LLPs
What does ER mean in terms of tax
Business sold for 876,000
Less: cost of shares (1,000)
Capital gain 875,000
Less: annual exemption 10,900
Taxable gain 864,100
ER CGT @ 10% 86,410
Walk away with 789,590
Sale of LLP

Suited to sale to other members of the team
No transfer of shares
On cessation of membership for any reason no
assets pass unless specifically agreed
Death


Sale of Ltd

Transfer of shares
On leaving the business shares remain unless
otherwise agreed
Death

Deferred consideration/earn outs

CGT treatment
Selling off in tranches
More flexible for LLPs



Deferred consideration/earn outs


Question:
Bill sells his interests for 300K payable 100K on
completion and 200K in stages depending on
future profits.
How much tax does Bill pay?


Changes to the Law regarding LLPs

HMRC want to see members take risk.

LLP members will be taxed as employees
subjected to PAYE and NI if all 3 conditions met.

If you fall foul of 2 then still self-employed.

Penalties and interest for the LLP. Tax
indemnities.

Changes to the Law regarding LLPs

Condition A: at least 80% of the
member's pay is fixed or if variable do not
vary in line with actual profits and losses of
the LLP.

Condition B: a member has no significant
influence over the affairs of the LLP.


Changes to the Law regarding LLPs

Condition C: a members capital stake in
the business is less than 25% of their
expected reward package.

Use of service companies with LLPs
Thing of the past
If mixture of individuals and companies
and where it is "reasonable to assume"
that one of the main purposes of the
arrangement is to secure an income tax
advantage for any member of the LLP
new rules then apply
Illustration of new tax rules

Question:
Fred earns 160K per annum fixed draw. It is
suspected that he is setting up a competing
business and he is fired. Fred claims unfair
dismissal.
What is the liability of the LLP?


Other factors to consider

Confidentiality
Reporting
Status
Success
ANY QUESTIONS
How can we help you?



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