As the owner of a small business, when you decide to “go limited” you have two choices – private limited company (LTD) or a limited liability partnership (LLP). When there are only 2 or 3 of you in the business it can be hard to make the choice – and it may not make much difference either way in the early days. The answer may lie in your plans for the future…
We outline here ten reasons why you should use an LLP
1. Flexible business structure.
2. Key individuals can be rewarded and retained by offering share of income profits and capital profits on a disposal without having to resort to establishing share schemes such as the EMI.
3. If the business of an LLP is acquired by a third party purchaser, they can claim tax relief on the amortised amount of the goodwill acquired. Whilst this can be achieved similarly in a company (where the company sells the business as opposed to the shareholders selling the shares) it avoids the double tax charge that arises where the buyer does not want to purchase the shares.
4. Where there is a corporate member, excess profits can be allocated to the member and are taxed at corporate rates.
5. Individual members profit share allocations are not liable to employers NIC. By contrast anyone using a company would suffer employers NIC at 13.8% on salary or bonus payments.
6. Where individuals possess business knowhow, the value of this knowhow can be introduced into the LLP. The individual members can draw surplus cash from the business against their capital account (represented by the knowhow) without an immediate tax charge. In a company, if a director or shareholder borrow from the company there is a tax charge under s455 Corporation Tax Act 2010 where they borrow in excess of the balance of their directors capital account with the company. There is currently no similar tax charge where an individual member borrows from an LLP against their capital account.
7. There are no taxable benefits in kind on individual members so there is no requirement for P11Ds. Any non-business element is added back to taxable profits.
8. Favourable tax savings where cars are provided to individual members.
9. Non-resident partners can avoid all UK taxes providing there is no UK trade carried out.If a UK company was used this would remain subject to UK corporation tax irrespective of the residence of the shareholders.
10. If all profits are extracted from a company there is not usually a massive difference in the actual tax payable on the profits as an LLP versus a limited company, particularly for profits under £200K. The LLP though can provide other tax planning opportunities as above.