Partnerships

PARTNERSHIP OR LLP – WHAT’S THE DIFFERENCE?

General Partnerships are subject to much less regulations than LLPs. Two or more people can run a business together and share in its profits and costs, according to their partnership agreement. They are each taxed on their share of the profits as personal income. However, they each have unlimited liability for the partnership’s debts and obligations, including those of any partners who have since left the business. 

An LLP (Limited Liability Partnership) is a separate legal entity registered at Companies House and does exactly what it says: protects the individuals in the partnership from its debts and obligations. A possible exception to this is if an individual personally guarantees a debt or liability, to a bank or supplier. The LLP operates according to its registered LLP agreement, but the tax treatment is, in most cases, the same as a straightforward partnership: each individual’s share of the profits is taxed as personal income. 

There are other partnership options including a Limited Partnership and Scottish Limited Partnership and we can explain the benefits of these and which vehicle is most suited to your circumstances. 

OUR SUPPORT AT A GLANCE

Our experienced team can support all your partnership needs. We will:

• Advise on structuring your partnership and the pros and cons of partnership or LLP. 
• Explain partners’ individual tax liabilities to them, including advising new partners on the opening year rules, and identifying individual tax and financial planning opportunities. 
• Manage the partnership’s tax liabilities to ensure only the correct tax is paid and sufficient tax reserves are maintained for each partner. 
• Advise on the disposal of partnership assets or changes to partnership profit sharing arrangements. 
• Help with exit strategies for retiring partners, including Capital Gains and Inheritance Tax mitigation. 
• Help with accounts preparation, audit (for LLP’s only) and partnership tax. 
• Help each individual partner complete and submit their SA100 Self- Assessment Tax Return, including page SA104 which declares your share of the partnership. 
• Help you prepare and submit your VAT Returns if your annual taxable turnover exceeds the VAT registration threshold. 

HOW ARE YOU TAXED IN A PARTNERSHIP OR LLP?

Even if you are already self-employed and registered with HMRC, you will need to register the new partnership. Ideally this should be when you start trading, but certainly no later than 5th October after the end of the tax year when you started. If your partners aren’t already registered as self-employed, they must each do this too. 

Tax in a partnership or LLP is similar to self-employment; each partner is taxed individually on their share of the partnership’s profits. If you’re already self-employed, you’ll be familiar with tax based on profits and losses, and with putting money aside for the tax bill that will inevitably arrive. The difference is that now your expenses need to be included in the partnership’s accounts for you to benefit from tax relief on your share of the profits. The arrangement is similar for capital allowances on equipment or motor vehicles you buy for use in the partnership.  

COMPANIES AS MEMBERS IN LLPS AND EMPLOYEES IN LLPS

Unlike Limited Companies, partnerships and LLPs don’t have directors, shareholders or guarantors. However, it is possible for a Limited Company to be a member of an LLP. In this case, the company pays corporation tax on its share of the profits, which can be withdrawn as dividends.  

To close a tax loophole, legislation was introduced to treat certain members in an LLP as Salaried Members who would be subject to same tax treatment as employees in companies, with PAYE, employer NICs, statutory sick pay and so on. To be a Salaried Member, they would have to fulfil three conditions, otherwise they would still be treated as self-employed members for tax purposes. We can explain this and advise if it affects you and how to mitigate against it.