The Same But Different! Changing Partnerships

The concept of the limited liability partnership (LLP) was introduced a little more than 20 years ago, and is governed by the Limited Liability Partnerships Act 2000.

As is evident from the name, a main attraction is ‘limited liability’; this may be why those trading in an ordinary partnership (or indeed sole traders considering entering a partnership) may want to consider an LLP as the format for their business.

Converting to an LLP

Similar to a company, an annual return and accounts must be filed with Companies House, but there is still some of the flexibility of an ordinary partnership. To convert a partnership to an LLP there are several recommended steps.

1. The partners must agree to the conversion. The reason for this should be set out, and any partnership agreement should be reviewed, as should the effect of the change on employees, suppliers, landlords and customers.
2. The LLP must be registered with Companies House. Information on this and related matters can be found on the GOV.UK website (tinyurl.com/GOVLLP).
3. The transfer of the business and any relevant assets and liabilities should be made by a formal transfer agreement.
4. The previous partnership agreement (if there is one) should be replaced by a new comprehensive LLP agreement.
5. The old partnership can be dissolved.

Tax Implications

Before agreeing to convert a partnership to an LLP, the partners should be aware of the tax implications. Generally, LLPs are transparent for tax purposes, so each member is charged to income tax or corporation tax on their share of income or gains as for an ordinary partnership (but see ‘Salaried partners’ below). As long as at least one of the old partners is a member of the LLP, there is a deemed continuation and no balancing events should arise. On an administrative note, the new LLP will be given its own unique taxpayer reference, but either this or the old one can be used.

Unless they change, there will be no disposal of the partners’ interests for capital gains tax purposes. There may be restrictions to loss and interest relief claims. Similarly, and subject to conditions, no stamp duty land tax will arise on the transfer of chargeable interests to the LLP. There is no disruption of the partner’s interest for inheritance tax purposes.

There is a transfer for VAT, but if the conditions are met, the ‘transfer of going concern’ provisions should prevent a charge from arising, and the old VAT registration can be transferred.

The LLP can take over the PAYE scheme of the old partnership. Alternatively, forms P45 could be issued to the employees and a new scheme opened. Generally, the Transfer of Undertakings (Protection of Employment) Regulations SI 2006/246 (TUPE) will apply so that employment contracts are taken over by the LLP with no break in employment.

Salaried Partners

As an aside on the subject of employment above, to combat ‘disguised employment’ salaried partners may be treated as employees unless they meet three conditions relating to the amount they are paid that does not depend on the firm’s profits or losses; their influence over the LLP’s affairs; and their capital contribution to the LLP.

Anyone considering converting a partnership to an LLP should take detailed advice on this issue to ensure that they will not be adversely affected by this rule, particularly as HM Revenue and Customs has recently changed its practice on the capital contribution aspect.

Conclusion

For partnerships that are growing or subject to risk, the LLP rather than a limited company may be a suitable alternative if limited liability is the prime requirement, while still retaining the flexibility of an ordinary partnership.

Practical Tip

Note that partnerships considering a transition to an LLP in Scotland and Wales should carefully consider any land and buildings transaction tax (Scotland) or the land transaction tax (Wales) implications.