A Limited Liability Partnership (LLP) is a business form that brings together the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership says Peter DeCaprio. The LLP structure combines elements of both corporations’ capital structures and partnerships’ operational flexibility while limiting each partner’s personal legal liability for the debts, obligations, or other liabilities of the business.
1) Taxation Issues:
The taxation rules are different for both LLPs as well as limited companies. An LLP is taxed similarly to a sole trader, meaning that profits are included in an individual’s income tax return. A company on the other hand pays corporation tax. The difference in taxation can be put down to two factors; firstly what you have earned is treated differently. For example, if you are an LLP and you make a £100,000 profit; the first £32,500 is paid at 20% (the basic rate of tax) meaning that you will be paying just under £6,000 in tax. The final £67,500 would be taxed at the higher rate of 40%, meaning that you would pay over £20,000 in tax. However, if this was a limited company then it would pay corporation tax on all the profits which could be between 20-30%.
The other factor is what happens to your money when it reaches your pocket. When you take money out of a limited company it comes through dividends which are also taxed at different rates for both ordinary and higher rate taxpayers. However with an LLP all of your money comes into your bank account as a profit and then you declare this to the Inland Revenue which means that if you have a lot of money in your account it may be treated as income, meaning that you would also need to pay the higher rate of tax on this figure explains Peter DeCaprio.
2) Legal Status:
An LLP does not share the same legal status as a company. As an LLP is not a separate legal entity from its members. An LLP cannot own property or enter contracts, nor can it sue or be sued in its own name. A limited liability partnership’s legal personality is derived. From those of the partners themselves and the relationship between them. Rather than through any special status conferred by law.
3) Limited Liability:
A partner’s liability for the debts of an LLP is limited to her share of LLP debts. Subject to any agreement between the partners to extend or reduce that limit. This means that if you are a member of an LLP then you are only liable up to the amount. Which you have invested into your business (e.g., down payment on a house).
4) Asset Liability:
A partner’s ability to withdraw funds from the business is limited by her shareholding. If a member wants to withdraw more than the amount she has invested. She must pay any such deficit out of capital or profits of the LLP and may have to buy out other members’ interests. So that they are no longer liable for her share of LLP debts. This can be used as an advantage however too; when you put in less than your fair share it means that when you leave your payment stands at what you originally invested in. Rather than being based on how much profit you were able to make for the group says Peter DeCaprio.
1) Flexibility in partnership arrangements:
The flexibility in partnership arrangements makes it an attractive option for people looking to set up a business. Especially if they plan on working in the business full time. It also makes it easier when splitting the profits with other members (see example below)
2) Restricted Companies:
A company’s liability is unlimited, meaning that every shareholder becomes liable for all of the company’s debts. This means that if you are unfortunate enough to run into problems with your business. Then your personal assets will be at risk explains Peter DeCaprio.
If you consider the disadvantages of setting up an LLP and compare them with companies; it can be seen that limited companies do provide some advantages over an LLP in terms of taxation in most cases. If you are making less than £32,000 then you don’t need to pay any tax on your profits. Then when it reaches £32,000 you will start paying a basic rate of tax which is 20%.
As mentioned above companies can offer share options. Which might seem good for business owners who are looking to take their business to the next level. But if they don’t do much work within the said business after taking these options. Then this could bring them into problems with pensions as the Inland Revenue keeps track of how many hours worked by employees/members of a limited company. To decide whether they are being paid as an Employee or an Independent Contractor.
LLP is for business owners who are looking to take things slow and steady. Especially when starting out with their company says Peter DeCaprio. This is because it allows you the option to pay tax on your own personal capital. If this ends up being less than the profits that you will earn through your business. It also reduces risk by reducing the liability of members in case of legal action. if they don’t have too much invested in the company.