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Home , Limited company, Partnership, Private limited company

inbrief

Limited Liability

Inside Key features and administration Members’ Agreements Taxation inbrief

Introduction Key features • any members’ agreement is a confidential Introduction document; and It first became possible to incorporate limited Originally conceived as a vehicle liability partnerships (“LLPs”) in the UK in 2001 • the and filing requirements are for use by professional practices to after the Partnerships Act 2000 essentially the same as those for a . obtain the benefit of limited liability came into force. LLPs have an interesting An LLP can be incorporated with two or more background. In the late 1990s some of the major while retaining the advantages of members. A company can be a member of an UK accountancy firms faced big negligence claims a , LLPs have a far wider LLP. As noted, it is a distinct legal entity from its and were experiencing a difficult market for use as is evidenced by their increasing members and, accordingly, can and own professional indemnity . Their lobbying property in its own right. In this respect, as in popularity as an alternative of the Government led to the introduction of many others, an LLP is more akin to a company vehicle in a wide range of sectors. the Limited Liability Partnerships Act 2000 which than a partnership. The members of an LLP, like gave birth to the LLP as a new business vehicle in the of a company, have limited the UK. LLPs were originally seen as vehicles for liability. As he is an agent, when a member partnerships as demonstrated on behalf of the LLP, he binds the LLP as by the almost immediate conversion of the major a director would bind a company. When a third accountancy practices and a number of large law party contracts with an LLP, unless he knows or firms soon followed suit. However, professional believes otherwise, he is entitled to assume that services firms comprise a minority of the LLPs the members are authorised to act on behalf of currently incorporated and they are now used the LLP. Members are not jointly and severally more widely as a business structure. liable for the contractual obligations of the LLP. An LLP is a different legal structure to both a Like a company, an LLP can create a floating traditional partnership established under the charge over its assets. Partnership Act 1890 and a The regime for LLPs is broadly the established under the Limited Partnerships Act same as for . LLPs can propose a 1907. In fact, as a general principle, partnership voluntary arrangement, apply to the court law does not apply to LLPs. However, an LLP has for an administration order, resolve to go into some of the characteristics of both a traditional voluntary and resolve for the LLP to be partnership and a private and in compulsorily wound up by the court. Members many ways can be described as a company on the of an insolvent LLP can be liable for fraudulent outside and a partnership on the inside. Legally or wrongful trading in the same way as directors it is defined as a body corporate with a legal of a limited company. In addition, members can personality separate from that of its members. be required to repay drawings or other payments The LLP structure is attractive to a wide range from the LLP received during the period of two of and is becoming an increasingly years prior to an insolvent liquidation of the common business vehicle used as an alternative LLP if they knew or had reasonable grounds for to a company or partnership. The reason for its believing that the LLP was unable to pay its debts popularity is the flexibility which it accords its at the time of withdrawal. members, combining advantageous aspects of both companies and partnerships. Depending upon the circumstances an LLP may be a suitable Incorporation and administration stand-alone trading vehicle, holding entity in a Incorporation of an LLP is straightforward and group structure or the special purpose vehicle for simply requires filling in a prescribed form with the a or strategic alliance. details of the first two members and the registered The key features of an LLP are: office which must be lodged at with the prescribed fee. The issues to consider • limited liability for its members; when choosing a name for the LLP are very similar • a separate legal entity; to those relevant to the choice of names for a company. Companies House will not register • taxed as a partnership; a name when it is the same as a name which is • organisational flexibility; already registered. Certain names will require the inbrief

prior approval of the Secretary of State, such as The relationship between the members themselves In addition, the provisions of the Companies Act “European”. You need to be aware of the risk of and the LLP should be fully documented in giving a member the right to apply to the court passing off by trading under a name already in use a members’ agreement to which the LLP if his or her are being unfairly prejudiced in your chosen area of business. It is important to will generally be a party. Like a partnership apply to LLPs. However, this can be excluded by check names already in use by searching domain agreement, this is a private document, and it need agreement between the members for an agreed name registries and on the internet. not be filed with the Registrar of Companies. It period of time and is a matter which should be is important that the LLP members’ agreement is addressed in the LLP members’ agreement, if Certain information similar to that relevant for comprehensive and properly drafted as otherwise appropriate in the circumstances. a company must be filed at Companies House, the default provisions prescribed by law will take including an annual return and any changes to the Generally, members of an LLP will not be effect. Unintended consequences may arise as LLP’s membership. employees and therefore not have the benefit of these rules provide that: certain statutory employment rights. However, An LLP is required to prepare “true and fair” • all members will share equally in the capital discrimination laws will apply and, in particular, the accounts, comply with the necessary accounting and profits of the LLP; new age discrimination legislation may mean that standards, have them audited if the audit compulsory retirement at a specified age for the threshold tests are exceeded and then file them at • all members can take part in the members of an LLP will be discriminatory. Companies House, where they will be available for of the LLP; public inspection. • members are not entitled to any An LLP must have at least two designated remuneration for management; Taxation members. There is no specific definition of a • no new members can join the LLP without The tax treatment of an LLP resembles that of a designated member but his or her duties are those unanimous consent of the other members; partnership rather than a company. The members that would normally be carried out by a company are treated for the purpose of taxation as partners officer and include responsibility for delivery • any difference arising on ordinary matters in that each is liable for the tax on his or her of accounts and returns to Companies House. connected with the LLP’s ordinary business share of the income or gains of the LLP. Rather Ultimately it is for the members to decide what may be decided by a majority of the than being treated as employees, the members additional responsibility the designated members members; and of an LLP are treated as if they are self-employed. have and address this in the LLP members’ • any proposed change to the nature of the Income tax and national insurance contributions agreement. LLP’s business requires the consent of all are payable on a member’s share of profits, members. however, as such amounts are not treated as , they do not fall within the PAYE regime and The members’ agreement should set out how the Members’ Agreements earnings will not be subject to employer’s national LLP’s profits and losses are to be shared amongst In some respects, however, LLPs do resemble insurance contributions. the members and deal with the appointment and traditional partnerships. An LLP has no share retirement of members. Key personnel within the business of an LLP can capital and is not subject to capital maintenance be remunerated tax efficiently and in a flexible requirements. Typically, the agreement will also cover: manner by their being appointed members of There is scope for real flexibility in the • funding and capital contributions; the LLP. Instead of being incentivised by way of arrangements between members. To change the based compensation, which may also be • meetings, management and decision capital and ratios between the members subject to income tax and national insurance making; according to changing circumstances of individual contributions, the gain on an in an LLP members is straightforward and can be done • authority of members; will fall under the capital gains tax regime, which from year to year. This compares favourably is likely to be more attractive than the income tax • expulsion or removal of members; with the position in a limited company, where regime. If the interest is held for two years, full the and any accompanying • financial consequences for a member leaving business asset taper relief may be available. shareholders’ agreement would have to be the LLP; If members were employees within a company, amended with the consent of the shareholders. • any restrictions on competitive activities after income tax would be paid monthly. Individuals Profit distributions can be varied without regard leaving; who are members of an LLP, in contrast, pay tax to their respective capital contributions and capital twice yearly under the self-assessment rules. surpluses can be allocated entirely independently • designated members and their of profit sharing. Goodwill may or may not be responsibilities; and Often, one of the members of an LLP is a special recognised on dealings between the members. • insolvency of the LLP. purpose company. The special purpose company inbrief

will pay tax on its share of the profits of the LLP. This is likely to be lower than the rate at which an individual is taxed.

Conclusion Prior to embarking on a new venture, an LLP should be considered as a legal entity which may produce a flexible structure with advantageous tax treatment. It was said that the price for limited liability for LLPs is the requirement of disclosure of financial information. For anyone used to operating as a company, this will make little practical difference. In an age of increasing transparency, that may also be a small price to pay for traditional partnerships contemplating conversion to an LLP.

For further information on this subject please contact:

Fergus Payne Partner T + 44 (0) 20 7074 8005 [email protected]

Clive Greenwood Partner T + 44 (0) 20 7074 8007 [email protected]

This publication provides general guidance only: expert advice should be sought in relation to particular circumstances. Please let us know by 5 Chancery Lane – Clifford’s Inn email ([email protected]) if you would prefer London EC4A 1BL not to receive this type of information or wish DX 182 Chancery Lane to alter the contact details we hold for you. T +44 (0)20 7074 8000 | F +44 (0)20 7864 1200 www.lewissilkin.com © February 2012 Lewis Silkin LLP