Forming a Limited Liability Partnership?

IMPORTANT

Suppliers, Inland Revenue,
HM Customs. Everyone looks to
YOU to settle their claims
when you're a Business Partner.

WHAT IS A LIMITED LIABILITY PARTNERSHIP?

A Limited Liability Partnership is a new form of legal business entity with limited liability also known as an LLP.

WHAT IS THE ADVANTAGE OF AN LLP?

Limited Liability Partnerships (LLPs) are a new way of organising a business. Whilst the business is legally a body corporate, the partners can limit their personal liability and avoid putting their personal assets at risk. This is not something that a member of a normal partnership can do. In addition they are no longer responsible for the acts of the other partner.

WHAT IS THE DIFFERENCE BETWEEN A LIMITED LIABILITY PARTNERSHIP AND A LIMITED COMPANY?

The main difference is that an LLP has the organisational flexibility of a partnership and is taxed as a partnership. In other respects it is very similar to a company.

IMPORTANT

With a Limited Liability Partnership,
you're 'out the pot'.

WHO CAN FORM A LIMITED LIABILITY PARTNERSHIP?

Two or more individuals or companies may form an LLP to carry on a profit seeking business with a view to profit. LLPs are not available for activities such as non profit making activities.

THE DIFFERENCES FROM A NORMAL PARTNERSHIP?

Apart from allowing partners to limit their liability, probably the most significant difference between an LLP and a normal partnership is that an LLP can enter into contracts and hold property in just the same way as a limited company. Most of the legal aspects of LLPs are very similar to those for a company.

WHO WILL WANT TO USE AN LLP?

Any profit seeking business or professionals such as Accountants and Solicitors.

a) The creation of an LLP may be a useful way of setting up a new business. Start up businesses have either chosen to be limited companies (LTDs) to try to limit their personal liability or become business partnerships making each partner liable for the liabilities of the business. Now an LLP is taxed and run like a partnership, but the 'partners' can limit their own personal liability - so in fact it's the best of both worlds.

b) Professional bodies

Firms of professionals such as accountants, lawyers and actuaries who normally operate as partnerships rather than limited companies are likely to consider the benefits of becoming an LLP, as these have been the bodies most concerned about the potential liability and personal risk involved in being a partner in a normal partnership. It has been suggested that some professionals have chosen not to take up partnerships because of the risk and there have been a number of cases where winding up a deceased partner's estate and therefore the distribution of their assets has taken a number of years because of outstanding litigation against the partnership.

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THE LIABILITY POSITION

An LLP is to be separate legal entity and although the liability of individual members can generally be limited, the LLP itself will be liable up to the full extent of its assets. In traditional partnerships individual members are jointly liable for debts and obligations incurred by other partners of by the partnership. For example, partners can find themselves liable for loss or damage arising from a wrongful act or omission by any other partners. The affect of the new legislation is that an innocent partner will generally no longer be personally responsible for the acts of another partner, this is a powerful protection.

THE MEMBERS' AGREEMENTS

An important feature of an LLP, which distinguishes it from a limited company, is that the members are able to agree on the rights and duties that they owe each other. This is not actually obligatory but it would be sound practice to have such an agreement and if no agreement exists, or if an agreement does not cover a particular issue, the Act has included some default provisions. These cover fundamental issues such as how members in the capital and profits of the business (the default provisions provide for equal shares) and they assume that every member takes part in the management of the LLP.

My Company

A company is seen to have as
having more prestige and status.
This may be partly image,
but it does affect behaviours
of clients, customers, suppliers
- and employees.

These agreements do not have to be published and so can remain confidential. A company is seen as having greater prestige and status. This may be partly an image, but it does affect the behaviours of clients, customers, suppliers - and employees.
We offer a draft members agreement for £50. This can be credited against our fees for LLP formation (£175)

TAXATION

The intention of the new rules is to treat LLPs as if they were carrying on a business as a normal partnership. The aim is to provide a halfway house between the flexibility of a partnership and the protection of a limited company. As a result, the taxation of LLPs will be very similar to that of partnerships but with some important differences.

A Company share can be sold or, for example, given away in a will. But if a sole trader dies, so does the business.

HOW WILL LLPs BE TAXED?

Where an LLP carries on a profit seeking trade, profession or business with a view to profit, then for tax purposes it will be treated as a trade carried on in a partnership by its members. Consequently, the property of the LLP will be treated as if it were partnership property. This means that:-

a) The individual members will continue to pay income tax under schedule D and Class 4 national insurance on their share of the profits from the LLP.

b) In some circumstances there are restrictions on the tax relief for interest and trade losses that members of an LLP can claim against income other than the LLP. This may have serious implications for businesses in loss making positions or for certain partners who have substantial borrowings.

c) Capital gains arising on assets held by the LLP will be treated as if the assets were held by its members as partners and consequently gains arising on the disposal of such assets will be treated as occurring to the members of the LLP and will be taxed on them separately. There are special rules to deal with gains arising on liquidation of the LLP.

INHERITANCE TAX

For inheritance tax purposes the members of an LLP are treated as if they were partners in a partnership. This ensures that inheritance will be charged in respect of members' interest in an LLP as it is in respect of partners' interest in a partnership and business property relief will be available on the same basis.

WHAT ARE THE IMPLICATIONS OF TRANSFERRING FROM A PARTNERSHIP TO AN LLP?

It is intended that the commercial choice between using an LLP or a partnership is a tax neutral one, so the transfer of an existing business to an LLP will only be treated for tax purposes as giving rise to a cessation of the business of the partnership and another would do so. The transfer of assets between a partnership and an LLP will only give rise to a chargeable gain or create capital allowances consequences if, in otherwise identical circumstances, a transfer of assets between one partnership and another would do so. Finally, stamp duty will not be charged on an instrument transferring property from a person to a newly incorporated LLP in connection with its incorporation.

There are many technical differences between Companies and Sole Traders with regard to tax and National Insurance, so talk to your accountant before deciding which is most advantageous for you.

WHAT DO I HAVE TO GIVE YOU TO FORM AN LLP?

1. The LLP Name (it will have LLP at the end).
2. The Registered office of the LLP.
3. Name, address and date of birth of each member.
4. All members must sign form LL IN01 to confirm they wish to stand as a member.

WHAT WILL YOU DO?

We will submit the completed LL IN01 and form your LLP in accordance with Company Law. We will complete the stationary declaration and obtain the new LLP Certificate of Incorporation. We will then forward all the relevant company documents to enable the new LLP to commence trading.

HOW MUCH DOES AN LLP COST?

£175.00 inc VAT regardless of how many members it has. This includes the members agreement (£50 when purchased separately).

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A 'COMPANY KIT'

National Business Register provides your full 'Company Kit' and these contain all items needed before and after Registration of your new Company. We provide and complete everything.

WHAT MUST I DO AFTER THE COMPANY IS FORMED?

i) You must affix a nameplate or sign bearing the LLP name at each place of business and at the registered office.

If all members operate from home then such a nameplate must be affixed to each address.

ii) All stationary must bear the LLP name, incorporation number and registered office address.

iii) Your accounting period runs from the date of incorporation to the last day of the month 12 months later.

ie. LLP formed 6/7/2002 - would file accounts for the period 6/7/2002 to 31/7/2003.

iv) The accounting period can be changed or extended by using form LL AA01.

v) You must file accounts within 9 months of the year end.

vi) Each LLP will receive an Annual Accounts for HM Revenue & Customs purposes only. The results are not made public, so it is difficult for suppliers to establish the strength of these businesses. This is why many suppliers prefer to or will only deal with a Company.

USEFUL ADDRESSES

National Business Register LLP
Somerset House
6070 Birmingham Business Park
B37 7BF
0121 678 9000

ACCOUNTANTS

Institute of Chartered Accountants
020 7920 8100
P.O. Box 433, Moregate Place,
London
EC2P 2Bj

The Chartered Association of Certified Accountants
020 7242 6855
29 Lincon's Inn Fields,
London
WC2A 3EE

SOLICITORS

The Law Society
020 7242 1222
133 Chancery Lane,
London
WC2A 1PL

Further information on starting a business can be found at  Business Link - Guidance on setting up a new business