Should you switch your Limited company to an LLP?

Following years of hits to the tax efficiency of Limited Companies, including several increases in dividend taxes and the huge rise in corporation tax, our analysis suggests you should consider utilising an LLP trading structure instead (consider being the important word here!).

Below we will share the basics in what an LLP is, the advantages of setting up or switching to an LLP structure and advice on whether an LLP structure is right for you.

This is complex stuff and there is no ‘one size fits all’ answer here so it is essential you discuss with your accountant or tax advisor.

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What is an LLP? 

A Limited Liability Partnership (LLP) is a unique business structure that combines elements of partnerships and limited companies. In an LLP, partners have limited liability, similar to shareholders in a company. This means that their personal assets are protected in case the business faces debts or legal liabilities.

Limited Company vs Self Employed vs LLP  

The Budget 2024 dealt yet another blow to the effectiveness of limited companies for small businesses. Partnership or self-employed tax rates consistently outperform limited companies at most profit levels. Limited companies only really hold their own when profits exceed the owners’ drawing requirement.

For businesses that do not “retain” much profit annually, it’s tempting to suggest you become sole traders or standard partnerships. However, there are serious drawbacks to being self-employed, the biggest being the absence of legal separation between the business and the owner. This means the owner’s personal property and assets are at risk if a customer or finance provider has an issue with the business. Put another way, it means that you, as the business owner, increase the risk to your own home and money based on the business’s performance.

Ideally, to be in the best position you want the protection of a limited company whilst paying the tax rates of an unincorporated business. This is where LLPs come in.

An LLP combines the benefits of a limited company, where legal liability is separated from the owners, with the transparency for tax purposes, treated similarly to any other partnership by HMRC. This allows you to benefit from the self-employment tax rates and benefits as detailed above.

We would advise any business with employed staff to structure itself within a Limited Liability Structure, not as an unincorporated business. If a standard limited company no longer works, an LLP might be the solution.

Even if you’re the sole owner, there are ways to set up an LLP to handle your business’s trade. Additionally, LLPs are well-suited for succession planning, providing flexibility to bring in new business partners over time.

Advantages of LLPs

We have always been a big fan of LLPs due to their flexibility, and now that the tax rules also support them, they look to be a much more generally attractive. Below are some advantages of structuring your business as an LLP:

  • Legally like a Limited Company – LLPs offer the advantage of limited liability, protecting partners’ personal assets while providing a legal entity structure similar to that of a Limited Company.
  • Uses self-employment tax regime: Partners in LLPs are typically taxed under self-employment tax rules, which can offer tax advantages compared to corporate tax rates.
  • No benefit in kind on company cars (for owners): Unlike in Limited Companies, owners of LLPs do not incur a benefit-in-kind tax on company cars, reducing tax liabilities.
  • Credibility and professional reputation: LLPs enjoy similar credibility and perception in the business world as Limited Companies, enhancing their reputation among clients, investors, partners and suppliers.
  • Employee retention: LLPs can structure incentives and benefits to retain key employees, fostering loyalty and commitment.
  • Expand and bring in new partners: LLPs offer a straightforward process for bringing in new partners, facilitating business growth and expansion.
  • Flexibility in pay structure: Partners in LLPs have flexibility in structuring their pay, allowing for customised compensation arrangements based on individual contributions and roles.
  • Roles vs. ownership: LLPs allow for separation of roles and ownership, enabling partners to focus on their areas of expertise while maintaining shared ownership of the business.
  • Succession planning: LLPs provide a structured framework for succession planning, enabling partners to transition ownership and management responsibilities smoothly. This can be particularly advantageous for professional services firms and family-owned businesses looking to ensure continuity and stability over the long term.
  • Collaborative culture: The partnership structure allows a collaborative and inclusive culture, where partners work together towards common goals and objectives. This collaborative environment can lead to innovation, creativity, and enhanced problem-solving capabilities within the business.

Drawbacks of an LLP

As with everything, there are some drawbacks of an LLP and some instances where an LLP may not be right for your business:

  • Have to publish at Companies House: LLPs are required to file annual accounts and other documents with Companies House, similar to Limited Companies, which may involve administrative burden and disclosure of financial information.
  • High administrative costs: Operating an LLP involves administrative costs similar to those of limited companies, including filing fees and compliance requirements.
  • Retained earnings are taxed on your personal tax rates: Despite limited liability, partners in LLPs are taxed on their share of profits at personal income tax rates, which may result in higher tax liabilities for some partners.
  • Entertainment: This is an expenses added back for tax purposes which means in effect you suffer all the costs of entertainment under self employed tax regime
  • Could be expensive to transfer: Transferring ownership or restructuring an LLP can be complex and expensive, involving legal and accounting fees.

So, should you convert your limited company to an LLP?

Business owners that are just starting, we would recommend setting up your business as an LLP in almost all scenarios. By establishing as an LLP from the outset, you can avoid the complexities associated with converting from a limited company later on. The tax advantages and operational flexibility inherent in LLPs can provide a solid foundation for business growth and development.

However, for businesses that are currently set up as limited companies, it is a lot more complex and there are a lot of considerations to make.

Existing businesses with lower asset values on their balance sheets, converting to an LLP may be relatively straightforward and beneficial.

However, for businesses with significant capital value, the conversion process can be complex and may require thorough analysis and consultation with professionals to assess the implications and benefits accurately. Business owners should carefully evaluate their specific circumstances and consult with experts to make an informed decision regarding the conversion to an LLP.

Other factors such as lending, capital value, future sale of the business, or growth plans will also all play a role in working out if an LLP is best for you.

While tax is important it shouldn’t be the tail that wags the dog.

At Chartered Accountants and Tax Advisers, we can guide you through the considerations and help you decide what is right for you business.

Book a free consultation with one of our experts now to see how we can help you reduce your tax liabilities. Email or call 01474 853 856.