The facility to operate as an LLP became a reality in the UK on 6 April 2003. That’s more than 6 years ago. Whilst an increasing number of professional service firms are migrating to an LLP structure the concept it still relatively unknown to most clients.
Why is that?
Given how many presentations that I and others have given at seminars and training sessions for accountants I am sure that most of them understand the key issues, differences and benefits of LLPs. When I lectured on this subject from around 2001-2007 I used a matrix to highlight the key distinctions as between the 4 principal alternative business structures in the UK:
• a sole trader;
• a conventional partnership (where the individual works with one or more partners in the business);
• a limited liability partnership – LLP – (this provides the individual and their partners with the protection of limited liability, just as with a company); or
• a limited company.
There is also a fifth option – the Limited Partnership (as distinct from LLP) – but this is rarely an attractive or feasible choice for smaller businesses. These old style Limited Partnerships were very restrictive, required at least one partner to have unlimited liability and precluded the limited partners from being involved with the management of the business. The LLP is a very different animal.
So why the apparent reluctance to discuss LLPs with clients?
I think it has much to do with something I never had cause to fully understand or to speak about. But it is a critical issue for accountants in practice. And until and unless they are clear on this issue I entirely understand why they don’t advocate LLP structures as an option when talking with their clients.
Quite simply it’s How do you prepare LLP accounts? Do the accounts prep software packages include an LLP option? Does the accountant fully understand the issues so as to be able to anticipate the accounting issues that are especially relevant? And so on.
In this connection I was inspired to write this piece after noting a CPD seminar “LLP Accounts Preparation” being promoted by Tolley in a flyer that arrived this morning. Sadly the event took place on 11 May and 1 June so it’s too late for now. If the content matches the title then this seminar could be very useful and deserves to be well attended if it is rerun.
If you’re already an advocate of LLPs, are aware of other sources of information on this subject or of accounts prep software that facilitates the preparation of LLP accounts, please add your comments below.
(If you want more on this subject I wrote an outline piece on another blog here: Limited Liability Partnerships (LLPs) – a better business structure than a limited company?)
I suspect it’s a case of unfamiliarity (sole trader/partnership/Ltdco is what everyone is comfortable with) – and, as you say, the lack of templates in accounts software. I know VT don’t have an LLP template.
Also, the other point is why would a client use an LLP rather than a Ltdco, as Ltdcos are more tax-efficient (though I have doubts about the ethics of the low-salary high-dividend route)?
Those clients who want to keep it simple, go for a sole trade or an unincorporated partnership. Those who want limited liability and/or to save tax, go for a Ltdco.
What can an LLP do that none of the others can?
(I’m curious.)
M
Thanks for your comment Emily (as ever).
You may have fallen into that old trap of assuming that Limited companies are always more tax efficient. Even if that were true (and it isn’t) there are numerous other factors to consider. We should never let the tax tail wag the commercial dog.
To quote Paul Johnstone who has commented on an earlier posting here about LLPs;
“LLPs are being used by new business starts. One reason is that when compared with a Ltd Co the formalised way of profit extraction are avoided. There is no S419 charge which with a company with low profits in early years often raises its head if borrowing is used until profits grow sufficient to support directors. Finally share of losses can be offset against other income”
Oh – and don’t forget that an individual can form their own ‘one-man’ company and then form an LLP with the dormant company as the 2nd member.
Thanks Mark – particularly for that quote from Paul. Points taken on board.
Richard Murphy also suggested the route for an individual to form a LLP (dormant company as the second partner).
I’m off to the Companies House website to do some more research on LLPs.
Thanks again.
M
sounds interesting
Don’t forget that for tax purposes the movement from LLP to Ltd Co is very simalar to self-employment to Ltd Co. So an LLP in early years gives Ltd liability protection and if the tax savings or extraction of profits senario’s is require the business can be moved relatively painlessly.