inbrief

Converting to an LLP

Inside Key features of an LLP The conversion process Main documentation inbrief

Introduction Key features of an LLP Board and with the Statement of Recommended Originally conceived as a vehicle Practice for LLPs. do not have to A is a different for use by professional practices to necessarily comply with the same standards. It legal structure to both a traditional partnership obtain the benefit of limited liability is therefore a good idea for partnerships which established under the Partnership Act 1890 and a while retaining the advantages are thinking about converting to go through the established under the Limited exercise of producing accounts in the formats of a traditional partnership, limited Partnerships Act 1907. In fact, as a general required for LLPs by the Act and liability partnerships (LLPs) have a far principle, partnership law does not apply to LLPs. applicable standards. Given that an However, an LLP has some of the characteristics of wider use as is evidenced by their LLP’s accounts will be published at Companies both a traditional partnership and a private limited increasing popularity as an alternative House, the public (and therefore its clients and and in many ways can be described as a vehicle in a wide range of suppliers) will be able to form a view as to how company on the outside and a partnership on the sectors. Led by the conversion of strong an LLP’s is. inside. Legally, it is defined as a body corporate the major accountancy practices and with a legal personality separate from that of its a significant number of law firms, members. many small owner managed limited The conversion process The key features of an LLP are: companies have also decided to Although the process is referred to a conversion, convert into LLPs. • limited liability for its members; it is actually the of a new entity which will be separate from the old partnership This client guide considers the steps • a separate legal entity; or . This new entity, an LLP, will that need to be taken to convert • taxed as a partnership; be incorporated at and the an existing partnership or limited process will then involve transferring all or most of • organisational flexibility; company into an LLP. the existing business of the partnership or limited • any members’ agreement is a confidential company to this new LLP. document; The first step to take is to review the existing • the accounting and filing requirements are to check what kind essentially the same as those for a company. of decision, if any, is required to transfer the The tax treatment of an LLP resembles that of a business to an LLP. Will a majority vote be partnership rather than for that of a company and required? If so, what type of majority and which for this reason smaller owner managed limited partners / will be entitled to vote? companies have been attracted to the idea of In the absence of such a provision, it is likely converting to an LLP. Rather than being treated that a unanimous vote will be required for a as employees, the members of an LLP are treated partnership, in which case, it is important that as self-employed for tax purposes. Consequently, all the partners of the partnership are in favour income tax and national contributions of the proposal to convert to an LLP. Depending are payable on a member’s share of profits and on the size of the business, it may be important because such payments will not fall within the to manage the communication process carefully. PAYE regime, the member’s earnings will not Indeed, if the partnership is large, it may be be subject to employer’s national insurance advisable for to conduct roadshows contributions. Therefore, key personnel within or presentations to partners to highlight the smaller owner managed can be advantages and benefits of conversion in order remunerated more tax efficiently. In addition, to receive a positive vote for the conversion. This because an LLP is transparent for tax purposes, it is may be necessary in any event if the existing the members who pay income tax on their business has offices spread across a number of shares, the LLP does not pay any on locations. any profit it makes. An LLP will need to prepare The communication process is also important as an annual balance sheet and profit and loss it will allow a partnership or company to deal giving a true and fair view of its position with any objections to the conversion before in accordance with the Companies Act. This will significant time and money is spent. It is possible involve complying with the applicable accounting that disgruntled partners may see conversion standards issued by the Accounting Standards as an opportunity to secure more favourable inbrief

terms particularly if a unanimous vote is required. Banks consideration in the transfer agreement will be Should they decide to use any leverage to their Bank accounts, overdrafts and banking facilities fulfilled by: own advantage, careful thought and planning will will have to be transferred to the LLP. This i. the LLP’s agreement to procure that each need to be given as to how best to deal with their will require the consent of the bank and it is partner becomes a member of the LLP; concerns. possible the bank may insist on ongoing personal guarantees from the members. The second step will be to identify all the business’ ii. the LLP’s agreement to credit certain suppliers and customers and to assign or novate accounts maintained by the LLP for partners Annuitants the existing contractual arrangements to the new in their capacity as members of the LLP. entity. The following are the most important A partnership may have obligations to pay former In the case of a conversion from a limited contractual relationships to consider: partners annuities. If so, consideration will need to be given to whether the conversion to LLP company, the company will often contribute its business in consideration for its appointment as Clients/Customers will terminate the annuity which may involve a breach of . It is possible annuitants may a member and the crediting to its capital account Consider amending any existing terms of not be prepared to accept the LLP in place of the with the LLP of an amount representing the value engagement so that it specifically provides that the partners and may insist on personal guarantees of the business. services may be provided to a client by a from the members of the LLP. From an accounting successor LLP. Otherwise, the client engagement LLP Agreement perspective, thought will also have to be given to will have to be assigned or novated in favour of the impact which the annuity liability will have on The terms of the existing partnership agreement the LLP. The manner in which this is conducted the LLP’s balance sheet. Whereas a partnership will have to be redrafted as an LLP Agreement. will depend on the type of client retainer in place. can keep such liabilities off its balance sheet, In relation to companies converting to an LLP, a Letters of notification will have to be prepared and LLP accounts have to comply with accounting review of the company’s sent to the clients and it is advisable that clients principles as referred to above and therefore have and/or shareholders’ agreement will be necessary are given advanced notification in order to deal to include such liabilities on their balance sheet. in order to ascertain which provisions will with any queries they may have. be retained in the LLP Agreement. Existing Other Suppliers arrangements (whether for a partnership or Property - Landlord Any with important suppliers, such as company) will most likely form the basis of the Depending on the terms of the lease, it is normal IT providers, consultants, insurers, hire-purchase LLP Agreement. Like a partnership agreement, an to obtain the consent of the landlord to transfer providers will need to be reviewed carefully to LLP Agreement is a private document, and it need the lease to the LLP. It is possible that a landlord ascertain whether they need to be novated in not be filed at Companies House. It is important may seek personal guarantees from the members. favour of the LLP. that the LLP Agreement is comprehensive Any freehold property may have to be transferred and properly drafted as otherwise the default to the LLP. Consideration needs to be given to provisions prescribed by law will take effect securing the exemption from stamp duty and from which may lead to unintended consequences, stamp duty land tax on transfers of property from Main documentation for instance that all members will share equally the partners of a partnership to an LLP. The main documentation required for a conversion in the capital and profits of the LLP. Although is as follows: - an existing partnership agreement will provide a Employees useful starting point for an LLP Agreement, there The Transfer of Undertakings (Protection of Transfer Agreement are significant differences between the two types Employment) Regulations, widely known as This will document the transfer of the business of agreement. The main fundamental difference TUPE, apply on a conversion. This means that of a partnership or limited company to the LLP. It is that whereas a partnership agreement deals all employees will automatically transfer to the will set out the assets and liabilities that are to be with the relationship between individual partners, LLP and their employment contracts will not be transferred to the LLP and will usually contain an the LLP Agreement will cover not only the taken to have terminated but will be deemed indemnity from the LLP in favour of the partners relationship between individual members, but also to have been made by the LLP. The employees’ of the transferring partnership or the transferring the relationship between the members and the continuity of employment remains unaffected. It company against all the liabilities taken on by LLP itself. may be necessary to comply with the consultation the LLP. In the case of a conversion from a requirements under the TUPE regulations. For partnership, typically no financial consideration firms where staff are employed by a service will be provided for the contribution of assets Conclusion company, no change is necessary. to the LLP but the contractual requirement for When LLPs were first introduced, it was said that the price for limited liability for LLPs is the inbrief

requirement of disclosure of financial information. For anyone operating as a company, this will make little practical difference. In an age of increasing transparency, many partnerships already disclose some financial information. Initially, the process of converting was often seen as being too lengthy and expensive. Several years on from the birth of LLPs the process of converting has become more streamlined (with a commensurate saving on costs) and, more importantly, LLPs are now widely accepted as credible business vehicle.

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