Tax benefits of being a Limited Liability Partnership

by | Apr 25, 2014

When setting up a new business, it’s important to take advice on how it should be structured. However, situations can change as businesses grow and develop and the structure chosen when a business started may not be appropriate a few years later.

Many businesses have converted from Limited Companies to Limited Liability Partnerships (LLP) in recent years due in part to the financial advantages offered by this structure.

As those working for the business are members of a Partnership, even if they are paid a regular salary they will be classed as self-employed. As the tax on their earnings is not paid through PAYE, it won’t be due until the end of each tax year, which can free up significant cash flow for the business.

National Insurance levied is also less than it would be for salaried employees, as no contributions are required from the company to members and Class 1 NICs are not applicable either.

For business owners looking to put in place share options as an employee benefit, it can be easier to convert to LLP and make employees members to allow them to share in the growth of the business.

New rules from 6 April 2014

On 6 April, new legislation came into place which affects LLP members who could be defined as employees due to the way they are paid (for example, they are paid a salary which would not be affected by the profit or loss incurred by the business) and the level of their involvement with the business. This is known as ‘disguised employment’ and the legislation has been brought in as an anti-tax avoidance measure by the government to ensure that members who are effectively working as employees are treated as such.

What are the implications of this change for LLPs with members who could be affected by the new rules? Salaried members will now be considered employees for tax and NI purposes. If the business is heavily reliant on the reserves generated by paying tax at a later date, it may be necessary to look for alternative sources of funding the business on a day-to-day basis, as tax will need to be paid on a monthly basis for these employees. Provision will also need to be made to cover the additional NI costs.

If you are unsure whether your LLP members should be classified as employees under the new ruling, or need advice as to whether to structure your business as an LLP following the legislation changes, we at Arram Berlyn Gardner can help.

Call us on 020 7330 0000 or email abglondon@abggroup.co.uk for more information.

 

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