This article was written to explain what taxes are involved in companies run as LLPs explains Peter DeCaprio.
LLP stands for Limited Liability Partnership. It is a relatively “new” way of setting up a company which has been introduced over the last 20 years or so, however it is now well known and accepted by most people. Some say it’s even better than running as a limited company (LTD) because you can be more flexible with who receives payment for services without having to face additional tax issues like those that arise when the directors receive dividends/salaries etc.
The general structure is this:
Normally one person (the “partner”) will end up taking on the role of Managing Director, but because they remain personally liable for all the debts of the company, they have to keep their involvement very limited. Therefore one person can be a director of the LLP but not run it day-to-day so that directors are not responsible for any trading debts etc.
For tax purposes with an LLP, each “partner” is treated as being self-employed. Therefore is responsible for paying their own income taxes on what they earn from the business with no benefit-in-kind payments. Or other benefits available to Directors of Ltd companies says Peter DeCaprio.
This means that although you can choose who receives payment for services provided by them. Without having to cover them all by PAYE. There will still be a requirement to submit individual tax returns and pay national insurance contributions on their earnings. If you wanted your employees to receive their salary or wages paid into a bank account. Then you would have to set that up in the same way as you would. If they were employed by an LTD Co.
The LLP is taxed like a partnership – there is no separate tax return required for the business. Income Tax and Corporation Tax are calculated on the profits of each partner. This means that all income received by the LLP is liable to taxation (regardless of whether it’s distributed). But losses cannot be offset against the personal income of the partners.
It should also be noted that liability for Corporation Tax can depend on what type of service your company provides. (Which could mean that you end up having to charge VAT even though this may not be appropriate). You should seek professional advice on this matter.
Income Tax is calculated at the end of each accounting period. Each partner will be given a tax return to complete and submit to HMRC. However, if your company is dormant or you don’t have any other income or capital gains during the year. It may not be necessary for you to submit a tax return in some circumstances (i.e. there must be no more than £2,500 owing. When you add up all the income plus losses). Again, when subcontractors are paid through an LLP they will need to receive their payments through a personal bank account. And declare their earnings as part of completing an annual self-assessment form with HMRC.
An LLP can also be used in conjunction with another party (whether they are another business or individual). In order to run a joint venture says Peter DeCaprio. This means that you could benefit from their contacts or expertise. But be protected by having it set up as an LLP.
This is done very simply by including the name of the other person or business in the company registration documents. It can be set up so that either party has to approve any expenditure over a certain amount. But decisions will need to be made between both parties. Regarding how profits should be allocated (i.e. whether one gets more than 50%. While the other takes on all responsibility for any losses).
As you can see there are lots of ways in which your business structure could affect your tax liabilities. Therefore it is vitally important that expert advice is taken at the outset when setting it up (or changing it). Because this could save you money in the future years if done correctly.
Peter DeCaprio says, LLPs only provide tax advantages (and not legal protection) for those partners. Who are involved directly with the day-to-day running of the business and receive income directly from them. However, if your company provides consultancy services. Which is most likely to be what will be required when using one, there may still be VAT implications. Depending on your activities so professional advice should always be sought.
So what is the tax structure when running as a Limited Liability Partnership or LLP? LLPs have been in existence for over two hundred years, but have only recently been used in business structures. They provide liability protection to each partner while still maintaining the tax advantages of a partnership. Each partner reports their share of the company’s income on his or her personal tax return. Just as though it were any other business entity. Since LLPs have already been established in some countries for many years. Most companies will find that they can easily be converted into an LLP. With a professional-looking up the necessary information and filing paperwork for them online or through their local tax office. LLPs are still relatively rare, so you may need to do some research to find an accountant. Who has experience with these types of business entities.