Headstart: LLPs – Is an LLP the right choice for you?

A limited liability partnership for you? Well, perhaps, given that from 6 April it will be possible to use LLPs by virtue of the Limited Liability Partnerships Act 2000. An LLP will offer limited liability to its members but will be tax transparent and offer flexibility in terms of its internal organisation.

But what are the issues if you want your existing partnership to become an LLP? The starting point is that the business represented by the partnership will have to be formally transferred to the LLP. Although the act includes provisions to assist such a transfer, such as stamp duty relief, it will necessarily involve costs.

Management of a partnership is invariably a thorny issue. But in the same way that all partners participate in management, so can all members of an LLP. What is important is ensuring that the agreement between members addresses the issue of management, particularly as an LLP does not have to have a formal members agreement.

The consent of third parties also needs to be born in mind. The bank’s consent will be required to transfer overdrafts and borrowings of the partnership to an LLP. Furthermore as the bank’s level of security will be less in respect of an LLP than a partnership, the bank may require personal guarantees from the LLP’s members. Similarly landlord’s consent will be required to transfer a lease from the partnership to an LLP. The extent to which this consent can be withheld may depend on the exact terms of the lease and any head-lease. Again, personal guarantees may be required as the landlord’s security will be reduced in respect of an LLP.

Consideration should be given as to whether any significant contractual liabilities of the partnership need to be transferred. In addition the treatment of annuities may cause significant difficulties preparing accounts on a ‘true and fair view’ basis.

Part of the ‘price’ to pay for an LLP is that it will be necessary to publish annual accounts. For some this will be a unacceptable. The legislation requires that the profit share of the highest earning member is also published if the LLP’s profits exceed #200,000. A further tax consideration arises in respect of overseas operations. LLPs will be tax transparent for UK purposes.

However, it is unclear whether other jurisdictions will treat LLPs in this way. It is possible some jurisdictions will ignore the situation in the UK and treat them as corporations and tax them accordingly.

Whether or not to have an LLP raises many issues, but there is clearly a need to plan ahead. At the very least the partnership’s engagement letter should provide for a transfer of the engagement if that is the way the firm decides to go. ?:

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