Unlocking the transition: Why accounting firms favour LLPs over Ltd structures

Limited Liability Partnerships (LLP) have existed since 2001 and have been a popular choice for accountancy practices to adopt as a vehicle in which to conduct their business. Though many practices will still operate as a general partnership, we are seeing more converting to a Limited Company (Ltd).

All options are viable but as a practice grows, or their needs change, the current setup may not be best suited. Whichever structure is adopted by practices, each should take a step back and evaluate the pros and cons of the options available, to see if their business requirements, future needs and vision are best served in the status quo.

Advantages of an LLP

As we are seeing more practices adopt a Ltd structure, it is worthwhile looking at the advantages of an LLP over a Ltd. Those who work, or who have worked, in a partnership, will know that whilst some senior staff will have a say, the big operational and visionary decisions are ultimately made by the members, who are also the owners. In a Ltd structure, the owners and operators are often different and so agreeing on something may take a while, leading to a slowness in the ability to adapt in a changing environment, or not being able to take advantage of new openings quickly.

As we are all aware, client service is key within the field accountancy and care must be taken to ensure any internal disagreements or conflicts of interest are managed, such that client service is maintained. Members of an LLP tend to be client-facing, whereas investing shareholders in a Ltd may not be, giving rise to potential conflicting interests. In recent years we have seen several accountancy practices taken over by private equity firms, with a Ltd structure, and so it would be interesting to see how such issues have been managed by these.

Members are the ultimate owners of an LLP whereas shareholders are for a Ltd. Members also are involved in the operational activity of their business but crucially, shareholders may not be. The attitude towards the implementation of strategies at operational level may differ between the two. A member will have agreed on the strategy and will be involved in the implementation, whereas this may not be the case for a shareholder.

An LLP can benefit from the members bringing their own set of unique skills and networks to the table, thereby enhancing the capabilities, and offering of the business. Directors within an Ltd can only enjoy benefits from shareholders if they are actively involved at an operational level.

Members will contribute capital into the business and share responsibilities with their fellow members. A sense of security can be found between the members, whom they may work with and see on a regular basis, as the risk is distributed amongst themselves. On the other hand, in an Ltd, unless shareholders engage in the day-to-day operational activities, such skills may need to be sourced from the appointed directors.

Partnerships are transparent for tax purposes and so whatever profits are made, will be subject to income tax and national insurance in the hands of the members based on their allocations. In a Ltd, post-Corporation Tax profits can be held within the business as working capital. Shareholders in a Ltd can receive dividends from post corporation tax profits but with corporation tax rates not at 25%, dividend tax rates almost in line with ‘earned’ income tax rates, and the further reduction of the dividend allowance to £500, the tax savings offered by a Ltd are not as generous as they once were.

The key steps

Transitioning an accountancy practice from Ltd to LLP will involve several important steps which must be taken into consideration. The shareholders of the Ltd entity must hold a general meeting and vote on a special resolution, requiring at least 75% agreement, to dissolve the company.

An LLP must be formally incorporated at Companies House ideally just before the company dissolution. This requires the designation of at least two members as designated members, responsible for overseeing compliance matters. Importantly, the LLP can maintain the same name as the former Ltd entity, ensuring the branding and recognition remains consistent.

Upon incorporation, drafting an LLP agreement is essential. This document sets out many aspects for the operation of the LLP, including profit sharing provisions, capital contributions required, and procedures for leavers and joiners.

Another critical aspect of the transition process will be to transfer contracts from the Ltd to the newly formed LLP. While most contracts are expected to be transferred, certain employee contracts may be eligible for protection under the Transfer of Undertakings (Protection of Employment) regulations (TUPE), potentially making them exempt from transfer.

The business transfer itself is likely not to attract any tax reliefs, necessitating adherence to standard rules. Additionally, having discontinued the Ltd’s trade, any losses that have been carried forward may be forfeited.

There may be a Capital Gains Tax liability crystalised on the sale of the original business assets. Whilst this will depend on the circumstances, an understanding of tax implications essential before embarking upon the transition process.

Having taken these necessary precautions, both the LLP and its members must then register with HMRC for tax purposes once incorporated. Members must ensure they understand the nuances of how they will be taxed as a member, as well as the tax implications of the LLP structure.

Accountancy firms considering establishment as an LLP encounter both pros and cons. However, in our industry’s context, the advantages of an LLP tend to outweigh the drawbacks.

However, the implications relevant to your practice will need to be considered and as always, advice sought to determine the best option for you.