Are you considering entering a partnership? This article is for you.
Elena Meskhi
Accountant & Tax Advisor for Digital Businesses| Owner & CEO of Elena Meskhi & Co.| Author| Professional Speaker | Investor|Virtual CFO
Partnerships might be a good solution for some businesses to reduce the impact of the recession. Here's what you need to know. When forming a company with a partner, you have a multitude of options available to you when registering your company. One of these options is a Limited Liability Partnership (LLP) - but what does this entail for you??
What is an LLP??
An LLP shares the same characteristics as a normal partnership structure, it has the same tax liability, internal management and distribution of profits but it provides a reduced financial liability (or limited liability) to each partner.
In an LLP, partners have a similar amount of financial protection as owners of Limited companies, and it enables the flexibility of a partnership in terms of internal management structure, taxation, profit distribution, and the rights and duties of partners.
One major thing to note about LLPs is that each partner is taxed through self-assessment as a “self-employed individual”, and the company does not pay corporation tax. This means that each of the LLP members is taxed individually on their share of the profits and they must each be registered with HMRC for Self Assessment, with the requirement to file a tax return each year, pay Income Tax and National Insurance on their personal income, as well as the requirement to maintain accurate accounting records for all work they carry out.
There are no shares to sell in an LLP and therefore cannot receive capital investment in exchange for a portion of ownership from non-LLP members.?
Each member’s liability is agreed upon between the members and is usually stated in a partnership agreement, this is often decided upon before incorporation with the assistance of legal support.
Limited Liability is a form of financial protection that reduces the amount of money each partner has to contribute towards debts and third-party claims, and this is limited to what the partners invest and any personal guarantees in place.
Beyond these agreements, the members’ assets and finances are protected. There is a flexible internal structure that can, with legal assistance, be changed at any time, and as often as required.
In the event of specific LLP members receiving more authority and/or seniority than other partners, regardless of their title, there is a requirement for a Partnership Agreement to be drawn up.
This will outline the duties, responsibilities, and powers of each partner, and will ensure all members are in full agreement about their individual roles and levels of authority to prevent conflict in the future.?
An LLP has quite a few requirements to be enabled to be set up, these include:?
With the LLP, as you have seen, there are “designated members”, and there must be at least two of them within the LLP.
These individuals take on additional responsibilities on behalf of the LLP and other members, such as registering and filing annual confirmation statements and accounts; registering the partnership for Self Assessment; Registering for VAT when applicable; reporting changes to Companies House and HMRC; maintaining accounting records; maintaining PSC and other statutory registers; appointing the accountant or auditor for the LLP; representing the LLP in any legal proceedings or during dissolution process; as well as ensuring the LLP and members adhere to all forms of statutory compliance.
If no two members are designated, then the law views all partners as designated members with these statutory requirements.?
New regulations for Salaried LLP Members
If there are salaried LLP members within the company, they must be treated as employees for tax and NI purposes, as long as the member has significant influence, and disguised salary (they perform services for the LLP in exchange for an income which is at least 80% fixed, or income that is variable but not affected by overall profits or losses of the LLP), and their capital contributions are less than 25% of the disguised salary.
These rules do not affect partners in traditional or limited partnerships, and they don’t necessarily affect all members of the LLP, as it is possible for an LLP to have both self-employed and employed members.
These new rules are likely to affect most LLPs as, more often than not, only senior partners have significant influence over business affairs. Where these rules do apply, LLPs are required to pay members’ salaries and NI through PAYE.?