Limited Liability Partnerships (LLPs) were introduced by the LLP Act 2000 and were the first new UK legal entity for nearly 100 years. They were intended for use by the larger professional practices but have already been utilized by a wide variety of businesses.
LLPs are not liable to income tax, corporation tax or capital gains tax on their profits and gains. Instead, the members of the LLP will each be taxed on their share of the profits or capital gains (including profits retained in the LLP). Thus the LLP business itself is “tax transparent”.
Although an LLP will be taxed as though it is a partnership, it is in law a “body corporate” with a separate legal personality from that of its members. This means that, unlike a conventional partnership, an LLP can enter into contracts and hold property in its own right. LLPs will also be able to continue in existence independent of changes in membership. Additionally, there is no need for a small number of members to act as nominees for all of their fellow members and the firm. LLPs need to be registered at Companies House in the same way as limited companies. They will receive a registration number and will be obliged to file annual accounts. Subject to exemptions for dormant LLPs and small LLPs, the accounts must be audited on a “true and fair” basis, in just the same way as limited companies.
As the name suggests, LLPs offer “limited liability” to all of their members. This is the same as applies to shareholders of a limited liability company. It means that (subject to two exceptions – see “Unlimited liability” below) on the insolvency of an LLP, each member’s liability extends only to the amount that the individual has contributed to the LLP by way of capital. In the same way as the liability of a shareholder in a limited company extends only to the amount he or she has contributed by way of share capital. Thus creditors have no recourse to members’ personal assets. Also, as in a limited company, persons who have made loans to LLPs will be treated as general creditors unless the loans were secured. Provided it is the LLP that enters into contracts with third parties, it will be the LLP that is generally liable for all debts, obligations, wrongful acts and omissions. The funds available to meet such liabilities will be limited to those within the LLP.
For LLPs there are two important exceptions to the basic concept of limited liability:
- If a member has accepted a personal duty of care to a third party and has acted in breach of that duty of care then the member will be personally liable. Similarly, if a member has accepted a personal contractual commitment and has acted in breach of that commitment, they will be personally liable to an action in tort in connection with the negligent work, etc. This position is no different from directors of a limited company who can become personally liable if they accept personal duties or commitments;
- Members might also have additional liabilities in the event of an LLP becoming insolvent if the “clawback” rules are in point.
All payments made by the LLP to members, by way of drawings, profit shares, repayment of capital and repayment of loans, constitute withdrawals of money by members from the LLP.
This term refers to the possibility that if an LLP becomes insolvent, then any “withdrawals” from the firm by any member in the previous two years are potentially vulnerable to a claim that they should be repaid. However, such a claim will only succeed if it can be shown that the member in question either:
- knew that there was no reasonable prospect of avoiding insolvent liquidation at the time of the withdrawal; or
- should have known, or ought to have concluded, that there was no reasonable prospect for avoiding insolvent liquidation.
LLPs will be “incorporated” and registered at Companies House by following a procedure similar to that for limited companies.
LLPs will normally be governed internally by a formal agreement between the members. There is no legal obligation on the members of an LLP to approve a “Members’ Agreement”.
The written Members’ Agreement can provide virtually anything that the members want it to in relation to how the LLP will be managed, how decisions relating to the LLP will be taken, how profits will be distributed and how capital will be contributed. As the LLP is a body corporate with a separate legal personality from its members, the agreement should also define the duties owed by members to the LLP, by the LLP to the members, and by the members to each other.
The Members’ Agreement will be a private document between the members and need not be filed at Companies House.
If the members of an LLP do not have an agreement between them as to how the LLP shall be operated, various default provisions apply under the LLP Act. However, these are extremely brief and unsatisfactory. For example, they provide that members will share profits equally irrespective of capital contributions to the LLP and that no member may be expelled for any reason.
The Government is keen to prevent any potential tax loss through the use of investment and property investment LLPs. The main thrust of the provisions relating to LLPs, is to discourage tax exempt vehicles and funds from using LLPs for property investment activities.
LLPs are in law regarded as “bodies corporate” and will be subject to aspects of company law. But for tax purposes they will generally have the same tax transparency as conventional partnerships.
The LLP Act 2000, introduced various changes to the Taxes Acts. These changes were intended to ensure that where an LLP carries on a “business with a view to profit” then its members will be treated for the purposes of income tax, corporation tax and capital gains tax as if they were partners carrying on business in partnerships. That is to say, the LLP will be regarded as transparent for tax purposes and each member will be assessed on their share of the LLPs income or gains.
Because an LLP is a “body corporate” an overseas branch of an LLP may well be taxed as a corporate entity in certain overseas countries. The Inland Revenue has confirmed that it will be for the relevant overseas tax authority to determine how the LLP and its members are to be taxed locally. However, the Inland Revenue has confirmed that it will be prepared to allow UK-based members to claim a double tax credit for their proportionate share of overseas corporate tax paid, when computing their UK income tax liability on the same income.
For UK tax purposes, dividends received by an LLP will be deemed to have been received directly by its members. This means that where foreign dividend income arises it will be the individual members that need to consider the relevant double tax agreements. Thus it will normally be the withholding tax limits applicable to individual members that will apply, such that there will be no relief (as there is for companies) for locally paid underlying corporate taxes.
The position will be similarly complicated for non-UK resident members of an LLP if the members’ country of residence considers the LLP to be a corporate body for local corporate taxes. In such cases it may regard profit distributions made to the members as dividend distributions and deny tax credit relief for any taxes paid by them in the UK (where the LLP is carrying on its trade or profession). Such income tax may be considered to have been payable by the LLP and thus a form of underlying tax, in respect of which the members are not entitled to claim credit overseas.
A UK LLP can be incorporated with wholly non-resident members and unless that LLP trades, or holds investments in the UK, its members should have no UK liability on their share of the LLPs profits. However, that could mean that the LLP would have no UK taxable presence and thus its commonly recommended that every LLP has at least one UK resident member, paying tax on its share of profits in the UK.
Cessation of LLP
Where an LLP comprises of only two members and one of them dies, for example, another member will need to be appointed within six months, or the LLP will be dissolved with the tax consequences following as set out below.
Technically, whenever an LLP ceases to carry on a trade or profession it will no longer be regarded as a “partnership” for tax purposes. Instead it will cease to be transparent and should become liable to corporation tax.
Strictly, corporation tax would be due on gains made at the LLP level after it ceases to trade, with capital gains tax being due on gains members’ make when they “realise” their interests on liquidation. This is the same as the double taxation which arises where valuable assets are held within a corporate structure.
However, where members wind-up the LLPs affairs informally without undue delay and where tax avoidance is not a motive, the Inland Revenue will treat the LLP as remaining tax transparent. Thus, where there is a gradual disposal of assets and settlement of debts with the liquidator appointed only for the final formalities, the prospective double taxation can be avoided.
However, once a liquidator is appointed, chargeable gains on the disposal of any of the LLPs assets by the liquidator will be computed by reference to the date on which they were first acquired by the LLP and their cost at that date. In the liquidation period, the LLPs capital gains would be treated in precisely the same way for tax purposes as those for any other body corporate. Similarly, members of the LLP will be taxed on any gain (or given relief for any loss) that arises on the disposal of their capital interests in the LLP.
The base cost of members’ capital interest will not be set by reference to the market value of that interest at the time when transparency is lost. Instead the allowable acquisition of each members’ interest will be determined according to the historical capital contributions made, as if the LLP had never been transparent.
If you’re considering incorporating anil tax Company Offshore but don’t want the stigma that can sometimes be attached to the use of classical Tax Haven Companies (eg BVI, Seychelles, Belize etc IBCs) then the UK model of LLP is an entity well worthy of close consideration.
OCI can set up a UK LLP for as little as $800 (and Nominee Members/Partners can also be supplied).
Warning: OCI are not tax advisers or legal advisers. Local laws can have an impact. Hence you should seek local legal/tax/financial advice before committing to set up a UK LLP.
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