Can LLP members also be employees? Explaining LLPs structure

A Limited Liability Partnership (LLP) is a hybrid business model that combines the operational flexibility of a traditional partnership with the limited liability protection, which is a forte of a limited company. However, there is confusion regarding the LLP’s members that keeps on arising now and then: Can LLP members also be employees?

Governed by the Limited Liability Partnerships Act 2000, an LLP is a separate legal entity from its members. It signifies that an LLP can own property, enter into contracts, and be liable for debts independently of its members.

Furthermore,  LLP partners, primarily known as members, carry out their roles and duties per the partnership agreement. It is the pivotal document that explicitly outlines the members’ profit-sharing ratios and key responsibilities.

This is the question this blog brings to the fore. We will look into the LLP’s structure to find out, can LLP members also be employees in line with the LLP Partnership Act 2000 and HMRC regulations. 

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Who are LLP members?

Members of an LLP are the partners who jointly own, contribute to, and share in the profits of the business. 

An LLP member is any person (individual or corporate) who enters into an agreement with other members to create a limited liability partnership or joins an existing LLP after its registration.

Essentially, there are two types of members: ordinary and designated. While there is no specific upper limit on the maximum number of LLP members, a minimum of two partners is required to incorporate an LLP at Companies House.

Similarly, an LLP must have at least two designated members at all times, according to the Limited Liability Partnerships Act 2000, who will perform extra duties on behalf of the partnership.

Moving ahead, they usually derive their income from profit shares rather than a fixed salary. It means that LLP members are not traditionally classified as employees but are treated as self-employed for tax purposes according to HMRC.

More importantly, LLP members are taxed under the Income Tax (Trading and Other Income) Act 2005 and must register with HMRC for self-assessment.

Subsequently, they are responsible for filing a self-assessment tax return and paying Income Tax and NICs accordingly.

Can LLP members also be employees?

We have just discussed above that the LLP members are considered self-employed for tax purposes. Now, the word self-employed takes the spotlight here. It is needless to say that being self-employed categorically means that you cannot enter into a contract of service with yourself to become your own employee.

As a result, you cannot assume the dual role by being both a partner and an employee of an LLP. It seems as clear as daylight, right? 

Well, if things were this easy with LLP members, we would not be answering the question, Can LLP members also be employees. The culprit to has caused this confusion is the Limited Liability Partnerships Act 2000 (‘LLPA 2000’).

Fundamentally, Section 4(4) of the Limited Liability Partnership Act 2000 (the Act) states:

“A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.”

It can be seen that this section does not give adequate clarity on can LLP members also be employees. As a result of this perplexity, individuals often relied on courts to ascertain whether a particular individual in an LLP is an employee or a partner. 

Thus, to find a rational answer, we must look at the question posed above from a different perspective: salaried member rules.

Although the general rule is that members of an LLP are not employees. However, there are exceptions to this rule. In 2014, HMRC introduced new legislation targeting salaried members of LLPs.

It is noteworthy that this legislation specifies conditions under which an LLP member may be treated as an employee for tax purposes.

By contrast, when a member does not satisfy the following rules, they will be considered self-employed. Primarily, in line with HMRC’s salaried member rules, an LLP member will be treated as an employee if the following three conditions are met:

Disguised Salary: 

If at least 80% of a member’s remuneration is fixed or not dependent on the LLP’s overall profit, they can be regarded as employed for tax purposes. In contrast, when a member has variable remuneration which goes up and down based on the LLP’s profits, they will be deemed self-employed.

No significant influence: 

Another condition that must be fulfilled to be an LLP’s employee is having considerable influence. If the member does not have significant influence over the vital affairs of the LLP, they can be employed under the LLP’s structure. For instance, if the member is devoid of authority to:

Steer the direction of the business;

Appoint or remove new partners;

Expand the scope of business;

Move premises. 

On the contrary, when the members wield the authority and control over substantial matters of the LLP, they will act as the self-employed, reporting and paying tax under self-assessment. 

Capital contribution: 

When learning can LLP members also be employees, a crucial condition is the member’s capital contributions. To elaborate, if the member’s capital contribution is less than 25% of their expected disguised salary, they will be taxed under the PAYE system as LLP’s employees.

Contrary to that, a member with a capital contribution greater than 25% of his expected fixed profit share will be a self-employed member of LLP.

Understanding LLP taxation for partners vs employees:

Now, after learning the conditions about when an LLP member will be an employee or self-employed, it is equally important that we delve into the tax dynamics of each. Knowing the tax difference between the two is an immensely important aspect of our question: Can LLP members also be employees?

Notably, in the eyes of HMRC, an LLP member operating as a partner or employee will have a different employment status. 

For greater clarity, salaried members will be obligated to pay income tax and Class 1 NICs on their earnings. These mandatory deductions are made at source through the Pay As You Earn (PAYE) scheme by the employer. Contrary to that, a partner will be classified as self-employed and registered with HMRC for self-assessment tax returns. 

In essence, while the tax obligations of salaried members are handled under the PAYE scheme, self-employed partners must register, complete, and file a self-assessment tax return annually to report and pay their income tax and NICs.

It is worth highlighting here that NIC obligations are different for both partners and salaried members of an LLP. How so? An employee will pay Class 1 NICs, which are automatically deducted from their salaries by the LLP, while LLP partners, classified as self-employed, are responsible for paying Class 2 and Class 4 NICs based on their profits.

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Can LLP members also be employees? Key considerations:

The idea of drawing parallels between an LLP and a limited company can be enticing. To clarify,  like a limited company, an LLP enjoys a separate legal status, its members enjoy limited liability protection, and it is incorporated at Companies House.

Regardless of the similarities between the two, the distinctions between them cannot be overlooked since both are different in many respects. The most prominent difference between the two is that an LLP member cannot and should not become an employee (unless, of course, the above-cited conditions are met), because if it mistakenly happens,  it can result in serious issues.

For instance, if later, the LLP wants to remove the ‘employee’, it will not be a breeze as terminating an employee in a limited company.

You can gain in-depth knowledge about LLP members by reading our following guides:

How do LLP members get paid in the UK? Learn the essentials.

What are the tax responsibilities of LLP members?

How to file the LLP confirmation statement in the UK?

Explaining how to remove a partner from LLP in the UK.

Explaining how to change details of LLP members in the UK?

Conclusion:

While LLPs are widely used by professional services firms such as accountants, solicitors, and architects, they are more suitable for businesses where two or more individuals want to collaborate to share responsibilities and profits.

Thus, it is crucial to learn can LLP members also be employees since understanding the distinction between the two is indispensable for tax compliance and financial planning.

Essentially, while most LLP members are classified as self-employed individuals under HMRC for tax purposes, certain conditions can trigger an employee classification. Consequently, it affects how tax is calculated, employment rights are granted, and administrative duties are fulfilled.

Now, to ensure accurate classification and compliance with HMRC rules, LLPs should count on expert guidance, such as the certified and affordable accountants registered on the platform of Accountingfirms.

From business registration to tax planning, preparing and filing annual accounts, and ensuring compliance, you can find an expert who will offer you the comprehensive and well-defined services you are actively searching for.

Hence, visit Accountingfirms today and find an affordable and location-based accountant to streamline your LLP’s core tax and compliance affairs.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.