LLPs are tax transparent. Ltds aren't. So, if the company makes a profit, it has to pay Corporation Tax and thereafter can distribute the net amount to it's shareholders.
Why would you bother? To the extent you want you could be a member personally (fnar) and also incorporate and have a company in there and then choose what to do with your profits. Dunno, while since i had to do this sort of stuff.
would you ever incorporate to avoid a tax charge on your pension? I think this is a fool's errand for a lot of reasons (not least that I am not sure it works)
The Equity at a previous LLP shop all had limited companies registered at companies house to hold their membership . Interestingly, all the salaried partners were on companies house in their own name.
so they obviously found incorporation worthwhile (and I suppose it probably limits liability although I never understand the bounds of that in a law firm context)
You have limited liability as an LLP member, you don’t need the extra layer of a company, dunno about asti’s old shop, but presumably this was to do with tax planning.
I also don’t know what you mean when you say “pensions charge”.
Is this not like the suicide by cop mentioned on the thread about EISs? I thought that incorporating yourself to do, as a company, exactly the same thing you were already doing as a human, automatically made a machine go 'ping' in HMRC and made them come after you?
Soz also to add if you’re taking about the individual member resigning and being replaced by a corporate member do you not end up with a massive tax charge on the capital? Depending on the capital split in the llp agreement I guess
if you have more than a certain amount in your pension you have to pay a tax charge, which represents a clawback of the tax relief given when you put the money in
I feel somewhat cry me a river about that but it can create a cashflow problem (and if you are on a defined benefit pension scheme you could be earning a relatively low sum when you are caught by it)
so, the idea is that your profits are paid into your company and obviously then you have to decide how to distribute the profits
there is also something about paying profits into a bare trust but I don;t understand how this would avoid an income tax charge - maybe making the trust a shareholder or sthg?
I did do some LLP stuff for a time a while back but I’m rusty and we always left the tax planning to the accountants, and it was vaguely specialist stuff.
In the situation you describe (and we typically dealt with fairly small partnerships) the usual approach would be to be a member personally to take advantage of any and all personal reliefs and also to control a company which was also a member to pay any additional profits to. You then treat that as you would any corporate revenue, there would be no llp specific way of treating it.
The central point is that LLPs are tax neutral so each member is taxed as if they receive the income personally.
Soz if this is mansplaining it but the above represents most of my knowledge of LLPs so I figured I would just splart it out.
I know so - at least for legal LLPs, but I cannot imagine that it is different for any other professional LLP.
As I recall it was to do with showing that you are genuinely self employed and not just a quasi-employee. One of the tests was having a certain amount of skin in the game - ie capital at risk.
What strutter is saying goes to my point, the llp is tax neutral and the member is taxed on the income they receive personally (and accordingly can’t simply use membership of an llp alone as proof they are self employed)
thanks, I did know the tax transparency side of things. I am interested in whether the incorporation is a practical solution to that specific problem. I think it probably doesn't work tbh. Shudder to think what they are doing with goodwill in them accounts.
That note is correct - there is no minimum capital contribution as a matter of law, but if you want to derive some of the benefits of being a partner in an LLP (mainly not pay all that NI) then HMRC require a certain amount of capital to be paid into the LLP (it has been a while since this came up, but I think it is something like 25% of basic annual drawings)
Yep, you either had to contribute at least 25% of draw, be a genuine manager of the LLP which almost no one is in a law firm, or have a profit shares which really did go up or down with the partnership profits which few fixed share LLP members would either want or have.
If you were to use a limited company, yes, the company would pay corporation tax prior to distribution to you but you'd receive your dividends from the company at dividend rather than salary rates which isn't unattractive depending on your total income for a year. And of course you'd pay yourself a directors salary in an amount equal to the personal allowance.
buzz - interesting. These partners/members definitely do keep their own share of the work (it is a private medical practice and they take whichever fees relate to the work they personally performed)
ps as they all also have NHS salaries the normal personal allowance thing wouldn't work (personally I would advise up to the class 1 threshold rather than PA)
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nobody???
kudos tbh there is nothing sadder than wasting your youth on the law
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heh!
vg
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I wouldn't want to use a limited company.
LLPs are tax transparent. Ltds aren't. So, if the company makes a profit, it has to pay Corporation Tax and thereafter can distribute the net amount to it's shareholders.
LLP profits are distributed gross.
I may need to get a life...
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Why would you bother? To the extent you want you could be a member personally (fnar) and also incorporate and have a company in there and then choose what to do with your profits. Dunno, while since i had to do this sort of stuff.
I doubt I will ever personally be an Llp member.
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thanks for your thoughts, jorrocks
would you ever incorporate to avoid a tax charge on your pension? I think this is a fool's errand for a lot of reasons (not least that I am not sure it works)
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wait sorry Iw as unclear
the LLP will still exist
but the LLP individual member will become a corporate member
I don't think the mixed partnership rules will apply because the individual will receive exactly the same profit distribution as before
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The Equity at a previous LLP shop all had limited companies registered at companies house to hold their membership . Interestingly, all the salaried partners were on companies house in their own name.
I moved in order to become a partner.....
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and entirely to avoid the pensions charge, zg
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that is interesting, asti
so they obviously found incorporation worthwhile (and I suppose it probably limits liability although I never understand the bounds of that in a law firm context)
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You have limited liability as an LLP member, you don’t need the extra layer of a company, dunno about asti’s old shop, but presumably this was to do with tax planning.
I also don’t know what you mean when you say “pensions charge”.
I don’t know much tbf
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Is this not like the suicide by cop mentioned on the thread about EISs? I thought that incorporating yourself to do, as a company, exactly the same thing you were already doing as a human, automatically made a machine go 'ping' in HMRC and made them come after you?
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Soz also to add if you’re taking about the individual member resigning and being replaced by a corporate member do you not end up with a massive tax charge on the capital? Depending on the capital split in the llp agreement I guess
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if you have more than a certain amount in your pension you have to pay a tax charge, which represents a clawback of the tax relief given when you put the money in
I feel somewhat cry me a river about that but it can create a cashflow problem (and if you are on a defined benefit pension scheme you could be earning a relatively low sum when you are caught by it)
so, the idea is that your profits are paid into your company and obviously then you have to decide how to distribute the profits
there is also something about paying profits into a bare trust but I don;t understand how this would avoid an income tax charge - maybe making the trust a shareholder or sthg?
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I don't think there's any capital in the LLP (it is a professional partnership and I don't think they own anything, they just rove)
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You have to put a certain amount of capital in after changes a few years back.
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I don't think so? This isn't a legal LLP if that makes a difference.
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Right ok I get that now.
I did do some LLP stuff for a time a while back but I’m rusty and we always left the tax planning to the accountants, and it was vaguely specialist stuff.
In the situation you describe (and we typically dealt with fairly small partnerships) the usual approach would be to be a member personally to take advantage of any and all personal reliefs and also to control a company which was also a member to pay any additional profits to. You then treat that as you would any corporate revenue, there would be no llp specific way of treating it.
The central point is that LLPs are tax neutral so each member is taxed as if they receive the income personally.
Soz if this is mansplaining it but the above represents most of my knowledge of LLPs so I figured I would just splart it out.
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I know so - at least for legal LLPs, but I cannot imagine that it is different for any other professional LLP.
As I recall it was to do with showing that you are genuinely self employed and not just a quasi-employee. One of the tests was having a certain amount of skin in the game - ie capital at risk.
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Hang on what? What do you mean not a legal LLP?
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Oh right a law firm. Carry on.
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strutter - I am looking at a guidance note which specifically says "there is no minimum capital contribution for LLPs in the UK"
can you point me in the direction of evidence to the contrary? genuine request - I cannot see any caveat in this
ZG - I mean the profession carried on through the LLP is not law
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What strutter is saying goes to my point, the llp is tax neutral and the member is taxed on the income they receive personally (and accordingly can’t simply use membership of an llp alone as proof they are self employed)
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thanks, I did know the tax transparency side of things. I am interested in whether the incorporation is a practical solution to that specific problem. I think it probably doesn't work tbh. Shudder to think what they are doing with goodwill in them accounts.
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I know the LLP is tax neutral (although they can actually be subject to corporation tax in some situations)
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Soz for multi posts, there is no minimum contribution but that affect the tax position.
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*that doesn’t.
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I’ll stop now. Best of luck.
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chz, zg
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That note is correct - there is no minimum capital contribution as a matter of law, but if you want to derive some of the benefits of being a partner in an LLP (mainly not pay all that NI) then HMRC require a certain amount of capital to be paid into the LLP (it has been a while since this came up, but I think it is something like 25% of basic annual drawings)
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Strutter has more elegantly said what I was trying to
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oh, it sounds like you mean in order to circumvent the disguised employee provisions
this isn't a disguised employment scenario
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I looked it up and ESM60005 apparently.
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thanks but that only applies in very specific circumstances
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My pleasure
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Exactly what strutter said .
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Yes
no
wouldn’t you end up with problems under the mixed membership rules and get taxed anyway?
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Yep, you either had to contribute at least 25% of draw, be a genuine manager of the LLP which almost no one is in a law firm, or have a profit shares which really did go up or down with the partnership profits which few fixed share LLP members would either want or have.
If you were to use a limited company, yes, the company would pay corporation tax prior to distribution to you but you'd receive your dividends from the company at dividend rather than salary rates which isn't unattractive depending on your total income for a year. And of course you'd pay yourself a directors salary in an amount equal to the personal allowance.
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good q, clubbers! I thought the mixed rules would only apply where the flow of profit couldn't be justified as a fee for work performed tho?
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at least that seems like the spirit of the guidance
wheesht, ray
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buzz - interesting. These partners/members definitely do keep their own share of the work (it is a private medical practice and they take whichever fees relate to the work they personally performed)
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ps as they all also have NHS salaries the normal personal allowance thing wouldn't work (personally I would advise up to the class 1 threshold rather than PA)
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So they'd satisfy that limb of the test and so would not need to pay in to retain non-employee status.
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exactly
so the capital contribution test is not relevant as I already said
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