Transcript Limited Liability Partnerships Presentation to Forshaws

Tax Planning for Partnerships – Comparison of Structures
Mark Briegal, Partner
Aaron & Partners LLP
Agenda
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The options
Pros and Cons
Key features and comparisons
Tax
Corporate and Hybrids
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Own use and clients’ use
The Options
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Sole trader
General partnership (GP)
Limited Partnership (LP)
Limited Liability Partnership (LLP)
Limited Company (Ltd)
General Partnership - Overview
• Partnership Act 1890
• Not a separate legal person
• No formal formation or incorporation
• Relationship between the parties
• Default rules, but partnership deeds important and common
• Tax transparent
• Self assessment – No accounts
Limited Partnerships - Overview
• Limited Partnership Act 1907
• Formal registration
• Limited liability for some; but must have one general partner
• Limited partners must not participate in management
• Tax transparent
• Self assessment – No accounts
LLP - Overview
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Limited Liability Act 2000
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Limited liability
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Incorporation and registration
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Disclosures
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Tax transparent
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No capital maintenance
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Self assessment
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Audit
Companies - Overview
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Companies Act 2006
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Incorporation and registration
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Shareholders
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Employees and officers
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Corporation tax
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Profit extraction
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Some tax reliefs
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Incentive plans
Limited Company - Pros & Cons
Advantages
• Risk management
• Recognised vehicle for M&A
activity
• Relatively low set up and
operational costs
• Potential goodwill extraction
• Retained profits taxed at
corporate rates
• Better structure for ABS &
share incentives
Disadvantages
• Inflexible succession planning
/ ERS
• Benefits in Kind regime –
particularly cars
• Very expensive:
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NIC costs
PAYE
NIC
Cash flow
Incorporation
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A corporate entity – the future traditional model?
Limited liability
Mixture of external, internal and bank funding
Profits belong to company – reflected in share value
Lower tax rates on retained profits
Separation of ownership, management and
employment
• Goodwill recognised
• Public disclosure
Categories of Partner
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Full partners – “equity partners”
Limited partners
Fixed share partners
Fixed share equity partners
Corporate partners
Sleeping partners
Salaried partners
Shadow partners
Non resident partners
Trusts
Companies
Categories of Members
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Designated Members
Equity Members
Non-equity Members
Fixed Share Members
Restricted Members
What happens to Salaried Partners?
What happens to Associates?
Can you have directors?
Promotion and demotion?
Things to Consider
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The business
Is it trading or investment?
Assets held
Risk
Profit retention
The owners
Residence
Domicile status
Management
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Tax position
(losses/other income)
Family position
The employees
Key talent
Incentive plans
Retention strategies
The future
Growth, succession and/or
exit strategy
Comparing the options
Sole
Trader
GP
LP
Ltd
LLP
Separate legal
personality
N
N
N
Y
Y
Tax transparent
Y
Y
Y
N
Y
Limited liability
N
N
Y
Y
Y
Audit
N
N
N
Y
Y
Publicly available
accounts
N
N
Y
Y
Y
Loss relief against
personal income
Y
Y
Y
N
Y
Employment
legislation
N
N
N
Y
N
Requirement to
have written
constitution
N
N
N
Y
N
Comparing the options 2
Sole
Trader
GP
LP
Ltd
LLP
Entity owns assets
and owes liabilities in
own right
N
N
N
Y
Y
Distinction made
between ownership
and management
N
N
Y
Y
N
Able to have tax
efficient incentives
N
N
N
Y
N
Ability to give floating
charge over assets
N
N
N
Y
Y
Transferable shares
N
N
N
Y
N
Restrictions on
repayment of capital
N
N
N
Y
N
Income tax charged
on retained profits
Y
Y
Y
N
Y
Tax Drivers
2012/13
2013/14
50%
45%
Employers National Insurance
13.8%
13.8%
Corporation tax (small companies/full rate)
20/24%
20/23%
10/18/28%
10/18/28%
Highest rate of income tax
Capital gains tax
Tax Drivers
Some Partnership Tax Issues
• LLP trading losses:
– Belong to the member rather than the LLP
– No loss relief available to the LLP – the member will claim
appropriate tax relief in their tax return
• Capital gains for members can arise:
– Disposal to third party
– Distribution of assets to a member
– Changing profit shares and adjustments posted through
accounts
– Changing profit shares and payments made between
members
Corporate & Hybrids - Professions
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Professionals face
commercial challenges:
Need to generate capital
internally
Attracting external investment
How to provide for employee
participation through tax
effective remuneration
Building capital value
Retention and incentivisation
of new or existing partners
Hybrid Structures – Established
Businesses
• LLPs - hybrids
• Partnerships/LLPs - corporate
partners
• Company - LLP subsidiaries
• Company - LLP hive downs
• VC/PE partnership and real
estate partnerships and funds
• Company - incorporation and
dis-incorporation
Hybrids - Service Companies
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Used as a vehicle to provide professional and support staff
Possibly practice services - e.g. HR, marketing etc
May be commercial advantages of operating a service
company as part of a growth or acquisition strategy
Service company re-charges at cost or small margin
Adjust taxable profits under transfer pricing rules
Corporate & Hybrids
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Introduction of a corporate member
Corporate has a share of LLP profits
Retains working capital at lower tax rate
After tax cash can be contributed to the LLP
Possibly recycle members’ capital
Flexibility for rewarding members
Incentivise employees through share ownership
LLP Structures
Holding
Company
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B
Membe
rA
C
Membe
rB
Membe
r C
Limited
Company
Subsid
A
LLP
Subsid
B
LLP
Sub A
LLP
Sub B
LLP Structures
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B
Outside
Investor
C
Holding
Company
Membe
rA
Membe
rB
Membe
r C
Limited
Company
Subsid
A
LLP
Subsid
B
LLP
Sub A
LLP
Sub B
Hybrids – Private Equity
Principals
UK Advisor
LLP
Fee
General Partner
Company
Fund Vehicle
Limited Partnership
Portfolio Investments
Services
General Partnership
Limited Partnership
LLP
Principals
How to remove?
• Directors are employees with
full employment rights
• Partners and members are
self-employed with only
discrimination rights
• Good employment contracts
• Good partnership and
members’ agreements
• De-equitisation
• Expulsion
Summary
• Pros and cons to all structures
• What is important?
– Flexibility
– Incentivisation
– Privacy
• Tax implications
• Hybrids can give some benefits of all options
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