LLP's - When And Why?

[BusterBloodvessel]

Hi Everybody,

Out of curiosity, I have been doing some reading on LLP's after somebody mentioned them to me the other day. I am struggling to understand why they would be used. I understand the benefits of limited liability, but why not create a Ltd company?

I did find this

Another big benefit of LLPs is that it has pass-through tax such that it avoids double taxation. LLP partners will only pay their own personal income taxes, while the LLP will not be taxed as a business entity.

So if I understand correctly, this would be the same as operating as a sole trader, i.e. anything you earn within a year is classed as your income so taxable at year end at your personal tax rate, you cannot "leave money in the company" as I often see people asking about as a sole trader, or take dividends?

Have I understood this correctly? If not, could someone explain?

And in either case, like I say has anyone any real world examples of where or why an LLP would be the most beneficial scenario for somebody? I am struggling to think of any.

I probably covered this in my business a-level many moons ago but that is long gone out of my head now

Thanks in advance!

 

[The Byre]

LLPs have very beneficial rules for NI contributions and have other benefits for specific activities, such as schools and legal partnerships, when charging (or rather not having to charge) VAT.

 

[Mr D]

Have seen couples use LLPs together for a business. Multiple times seen authors use it, bringing their partner in on income and impacting tax.
Whether beneficial to any one person I'd suggest they seek advice giving all the relevant details to a business advisor. What is right for one business may be not ideal for another.

 

[BusterBloodvessel]

Thanks both for your replies. And without meaning to dismiss them (I really hope this doesn't come across badly) - could anyone elaborate or give a more detailed breakdown example? I keep seeing things such as the comments above i.e. beneficial rules for NI contributions or other benefits...

..but how/when? And if they have these beneficial rules, why doesn't everybody use them, I suppose there are some downsides?

Just wondering if anyone can say "xyz school" or "xyz chip shop" was doing this, which results in xx happening as a ltd company but as an LLP allowed them to do yy instead.

Like I say, please don't think I'm being dismissive, I'm just really struggling to understand what would constitute a "real world" scenario for use...

 

[The Byre]

NI - The individual partners in an LLP only pay NI on their side of the ledger - there is no employer's side as there is no employer. The same applies to payroll taxes.

VAT - A teacher does not have to charge VAT for teaching services if that teacher is the owner or part owner of the school. Therefore a music school with, say, £1m TO as a Ltd Co. has to charge its pupils an extra £200,000 in VAT. As an LLP owned in part by the teachers, it just charges them the basic fee without VAT.

 

[Anna Chandley]

A big advantage of an LLP compared to Ltd companies is flexibility with profit sharing arrangements and its why many of the large accountancy and law firms are set up as LLPs.

You might have 20 partners whose profit share is based on different group of clients within a business and their share of profits may vary from year to year. Within an LLP it is easy to allocate profits between the different partners but if there was a Ltd company it is not so easy to pay dividends in different proportions to shareholdings unless you have 20 different classes of shares. It is also easier to deal with partners leaving and joining an LLP then it is to be dealing with share issues and sales in a Ltd company.

An LLP is really suitable for those businesses that like the flexibility of a general partnership but want to limit their liability.

 

[BusterBloodvessel]

Thankyou both! That is starting to make a bit more sense. Our business has 3 shareholders, two who are taking larger regular dividends so we have a shareholders agreement in place to cover this - but I can see why more partners or a more fluid arrangement like you mention Anna would be a nightmare.

Understand the NI side of it as well, seems to make sense.

I assume the VAT benefits like the school opportunity you mention are very specific for certain industries - schools, charities, etc? Otherwise we would all be registering LLP's to avoid VAT I guess?!