Have you thought about transitioning your practice from Ltd to LLP?

Accountants discuss the benefits and complexities of converting accounting practice business structure.

Before 2001, prospective UK-based business owners could set up as a sole trader, a limited company or a general partnership. But after 1996 legislation in Jersey allowed businesses to register as Limited Liability Partnerships (LLPs), the Big Six began campaigning for similar legislation in the UK. In April 2001 legislation was introduced allowing business owners to enter into partnerships with one or more partners on a limited liability basis.

Under an LLP arrangement, each partner owns the company and has an equal say in business strategy and operations.

Unlike general partnerships where partners are jointly responsible for the actions of other partners and are therefore jointly liable for business debts, risks and litigation in an unlimited capacity, the legal responsibility of a partner in an LLP arrangement is capped at their financial contribution.

There are of course pros and cons associated with every business arrangement, from a tax perspective as well as legal liabilities and employment rights. You can read about the key differences between company formations here.

A business may be set up under one arrangement but at some point be converted to a different trading arrangement. As such, we asked several accountants about converting practices from a limited company to an LLP arrangement: should you do it and what might the pros and cons be?

It’s not a straightforward change but there are benefits

Kiran Chotai, Senior Manager, Private Client and Partnerships, haysmacintyre

Historically, accountancy practices have tended to establish themselves as traditional partnerships, with many converting to LLP status over the last 23 years.

The majority of top 100 practices are set up as a partnership. Limited company setups tend to be those acquired by a private equity company.

There is no straightforward mechanism to transfer a business from a limited company to an LLP. This usually requires closing one entity and starting another which comes with their own legal and tax implications.

Accountancy practices have always prided themselves on providing excellent service to their clients. A partnership structure, where the partners own their business and deal with the clients themselves, will be encouraged to promote this principle. Limited companies still offer this but there can be instances where the shareholder is not the one dealing with clients which may lead to internal conflicts.

In addition to offering limited liability, the main benefit of setting up as an LLP is flexibility. The ability to appoint or resign members, and dealing with their profit share, is easier in an LLP than the rigmarole of share allocations, dilution, and potential capital gains tax implications.

Partnerships are also transparent for tax purposes: members file their own tax returns and also pay tax on their profit allocations, not the partnership itself.

A common issue I encounter is aligning the NIC position of an individual transitioning from an employee/director to a member, which is simple enough to deal with, but something HMRC often struggles with.

Verdict: It’s not straightforward to transfer from a limited company to an LLP but there are benefits in doing so.

Small accountancy practices may benefit due to tax implications

Natalia Micu AATQB, Freelance Accountant and Management Accountant, Novenary

The LLP and Ltd are similar as they are both treated as separate entities from members and shareholders. Members can sign contracts, employ staff, own property or be sued in a dispute.

The biggest difference is the liability of the members, shareholders and directors: in Ltd, liability is limited at their capital investment, while in LLP, liability is transferred to its partners.

There are benefits of a LLP arrangement:

• Greater flexibility – members can change the share of profits, management structure, how decisions are made and how members are appointed.
• Distribution on profits is automatic at the end of the year, under a pre-arrangement split made at the formation. In Ltd however, profits are retained and paid as dividends based on shareholding percentage.
• No Corporation Tax is paid as it’s the members who are taxed not the entity. Instead, members are taxed separately on their share of profits and each file Self Assessments.
• Lower rate of tax: The LLP tax rate is between 40-47% whereas Ltd arrangements can be liable to double taxation where income source is taxed twice (Corporation Tax for business profits and shareholders tax on dividends). Ltd tax rate is between 50-60%.  

Businesses wishing to transfer to a LLP arrangement must hold a general meeting with shareholders to ask for approval. A 75% majority vote is needed.

Although the decision to transition is up to the shareholders, I believe that many small accountancy practices are better off as LLPs due to the tax implications.

Verdict: Many small accountancy practices will benefit as LLPs due to tax implications and other benefits, though this does require shareholder approval.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.