A number of firms in the financial services industry are looking to convert to Limited Liability Partnership (LLP) status. But what is driving this desire for conversion and are LLPs the structure of the future?
Prior to the introduction of the LLP Act 2000, which came into force on 6 April 2001, firms trading as partnerships invariably did this under the 1890 Partnership Act. This meant that all partners had joint and several liability for the debts of a firm, with a large-scale claim against a firm potentially resulting in the bankruptcy of all partners.
The new LLP structure removes this burden such that, in most cases, a partner’s liability in such a scenario would be restricted to the loss of his/her interests in both his/her capital and undrawn profits within the firm. In some circumstances the individual partner or partners who provided the defective advice may still retain a degree of unlimited liability.
Therefore, it was fairly rare for a business within the financial services industry to be structured as a partnership. Directors involved in such businesses preferred to obtain the limited liability protection afforded by a limited company. However, a limited company has a far less flexible structure, with remuneration often requiring shareholder approval and any profit distribution being assigned to shareholders in their pre-existing shareholding ratios. This often results in rewards for a successful year being paid out as remuneration via a bonus or possibly being distributed more widely to a shareholder group, much to the chagrin of the individual whose performance created the profit for the business.
Obviously, most shareholders would recognise the performance of the individuals concerned and wish to reward good performance via remuneration. The difficulty here is that while such bonuses are liable to income tax and employee National Insurance (NI) in a manner similar to that of a partner in a partnership or LLP, there is also the additional burden of employers’ NI at 12.8%, which would have to be paid to the Treasury. On a bonus of £1 million the additional £128,000 employers’ NI liability can be a significant burden. However, if paid as a profit share from a partnership or LLP, the employer’s NI falls away, although there are other minor differences that may affect the total saving.
Therefore, as a result of the introduction of the LLP structure, many businesses within the financial services industry are seeking to change their structure to take advantage of the LLP format. This enables greater flexibility in structuring the business and in rewarding individuals for past and existing performance, as well as making a significant saving in the amount of money paid to the Treasury.
Where a business is reliant upon a few key individuals, it is often better to have an LLP structure to enable the business to reflect more closely the performance of the individuals concerned. Where an existing business wishes to convert to LLP status, several issues need to be considered, particularly in relation to the value attached to the existing business. However, with careful advice and planning, most hurdles can either be circumvented or dealt with in such a way that they do not crystallise until a future date, by which time the significance of the burden may well have eased through the passage of time and inflation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.