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Beware the LLP!

23rd January 2014

The LLP (Limited Liability Partnership) has been around for a good number of years now, and is a very popular business vehicle for professional practices such as solicitors and architects, as well as for certain investment and property businesses.  There are, however, some serious bear-traps, minefields and other "gotchas" lurking in the undergrowth to trap the unwary.

"Aha!" I hear you thinking, "I know all about the new tax rules for LLPs!"  These are the rules which make tax planning using "mixed" partnerships, with both corporate and individual members, more difficult to implement.  This is a shame, because the LLP structure presented a great opportunity to take advantage of low (20% or thereabouts) corporation tax rates on business profits, by allocating those as profits to the corporate members of an LLP.  The new rules curtail that opportunity, unfortunately.  But no, that's not what I'm hoping to warn you about!

"Of course not!" I now hear you exclaim, "It's about the removal of the presumption of self-employed status for LLP members."   Yes, that's sad too, and when it comes into force as expected with the next budget, it will mean that LLP members, unless they can demonstrate that the nature of the work they do is truly self-employed, are at risk of being clobbered with PAYE and Class I NI.  That's another removal of a great tax planning tool, which allowed us to get certainty as to liability in some borderline situations.  But no, that's not what I wanted to talk about either!

When a new business starts, the founders rarely have the time, the money or the inclination to implement the "proper" legal framework which the textbook and best practice would advise.  Every company with more than one shareholder should put in place a Shareholders' Agreement from Day One.  Similarly, every (traditional) partnership should execute a Partnership Deed on Day One.  But in reality, many don't.  And it's not the end of the world, because, in the absence of such a document, the "default" position applies and it does a reasonable job of regulating most situations.  For traditional partnerships, the Partnership Act of 1890, followed by a century and quarter of case law, covers most things that can happen and determines a reasonable outcome.  Similarly, for companies, many, many revisions of legislation have improved the standard Articles of Association, people have got to know them, and, along with a bit of case law, the result usually gives a sensible outcome when there is an issue which needs to refer to the company's constitution and related law.

This is not so with LLPs.  Although, legally speaking, LLPs are a form of company which just "looks like a partnership for tax purposes", there is very little default regulation in the legislation, and some of it is, frankly, barmy.  Although LLPs have been around a few years, there is nothing like as much case law to guide us as is in force for traditional partnerships.  Having seen the risk attached to the danger of these unpredictable and illogical outcomes, I have made a New Year's Resolution to insist that all my LLP clients get a properly drafted deed in place.  The dangers of not doing so are way too scary!

I'd be most honoured if you'd follow me (@SimonBizTax) on Twitter!