LLP vs LTD

CATHERINE 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 member’s 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?

Visit www.gannons.co.uk for further information

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