INTRODUCTION
Recent changes in Company Law have introduced a new kind
of corporate entity – the limited liability partnership or LLP. This is in
essence a legal entity just like a partnership with the important advantage
that the partners liability is limited to the assets of the LLP, rather than
the partners having unlimited liability of their personal assets to supporting
the partnership if it got into problems.
The killer advantage behind the LLP is that partners in an
LLP continue to be taxed as though they
were still self-employed whereas a conventional limited company forces the
proprietor shareholders to be remunerated through PAYE topped up by dividends,
and thus pay a higher rate of tax.
The notes attached cover this in more detail.
LIMITED
LIABILITY PARTNERSHIP - LLP
This is a partnership with no share
capital formed for you, which you own. You, or persons of your choice, own the
LLP.
The advantages
of your own LLP:-
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No
problems with PAYE on drawings or dividend calculations. You get taxed as
self-employed. This reduces your overall personal tax liability each year. PAYE
taxes at basic rate are 22%+11%+12.8%=45.8%. Self-employed rates are
22%+8%=30%. See example
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you
can choose your name with few restrictions
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pension
options are fairly open
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fixed
asset purchases such as computers and motor vehicles are straightforward
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you
have complete control over the funds of the LLP
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any
losses from your share of the results of the LLP are offsettable against the
rest of your income just like real self-employed people.
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Similarly
if the LLP owns property where Capital Gains is involved, it is part of your
personal CGT situation rather than the LLP. If you make a large Gain of course
this is a big drama.
In the uncertain middle is
S.660 risks.
Briefly HMIT is targeting
companies where some of the dividends will go to a scarcely working partner
disproportionately to the work effort applied. Whether this new regime will
apply to LLPs with similar profit-sharing arrangements remains to be seen.
A .pdf of this note is here
Some disadvantages of your LLP are:-
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virtually
none of any significance!! Below the niggling minor points are detailed.
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If
it turns out you only need the LLP for a short period you are still lumbered
with paying a whole year of our fees as most work on a LLP takes place whether
6 or 12 months trading is in a set of accounts. Similarly two sets of accounts
= two fees unfortunately
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Because
you are taxed as self-employed ALL the profits of the LLP get taxed each year.
This means an LLP is unlikely to suit persons with taxable profits per partner
over £40-50,000pa.
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Some
of your customers may be a little uncertain about dealing with an LLP as they
are a new type of entity in UK. For one-man contractors working for agencies
this could be a problem
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You
do need two members, so you need a friend. We can act as your sleeping member.
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You
do need a partnership agreement briefly covering profit allocations, and
ownership, and break-up matters.
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Being
taxed as self-employed means you only pay tax at end of January and July each
year. In future you will have little idea of how tax bills are worked out
because the self-assessment system seems to conspire against you to stop you
understanding what’s going on. The two bills per year will seem like a lot of
money when you write the cheques out sobbing into your Stella sitting next to
the pool at your Spanish villa.
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All
governance regulations re Companies House are just as tedious as they are with
a limited company. Therefore if your year end is 28th February the
filing deadline is 28th December each year unless it’s a leap year
in which case it’s 29th
December drone drone drone…..
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You
have to file annual accounts with Companies House so your financial details are
more public than before.
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The
names index is the same one as for limited companies. This means that Fred
Smith LLP is already taken by Fred Smith Ltd.
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As
with a company your details are on public file.
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And
also the Annual Return to CoHo is £35 for some bizarre un-justifiable reason.
LIMITED
COMPANY
This is a company with a share capital
formed for you, which you own. You, or persons of your choice, own the issued
share capital, and you are a director of the company. You operate the company
on your behalf paying your expenses, salary and dividends, tailored to your
needs. There are, however, a number of
important matters to consider when thinking of setting up your company.
The advantages of your own limited company:-
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you
can choose your own company name with few restrictions
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pension
options are fairly open
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fixed
asset purchases such as computers and motor vehicles are straightforward
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you
may wish to be a director
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dividends
can be paid to others who are shareholders in the company. This can assist with
tax planning.
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Profits
accumulated in the company only bear tax at Corporation Tax rates, this can
help at least defer higher rate tax liabilities.
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you
have complete control over the funds of the company
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formation
is cheaper than for an LLP.
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Annual
return to CoHo a snip at £15pa.
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Capital
Gains are insulated within the company, and only bear tax at CT rates.
Some disadvantages of your limited company are:-
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you
are a director of the company
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as
the company usually has only one or two employees, and is controlled by you it
is not usually suitable for contracting whilst overseas.
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IR35
enquiries from Inland Revenue a possibility now their odious and bureaucratic
scheme has started. Well-drawn accounts prepared by a good accountant here will
help!!
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Dividend
calculations are your responsibility, assisted by ourselves. Some contractors
find this quite a problem area, and could therefore consider using one of our
umbrella companies until comfortable with the dividend system
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If
it turns out you only need the company for a short period you are still
lumbered with paying a whole year of our fees as most work on a limited company
takes place whether 6 or 12 months trading is in a set of accounts. Similarly
two sets of accounts = two fees unfortunately.
In summary the case for using LLPs is strong so take the step to
independence and running your own business. No more 30 days holiday year,
35-hour weeks, free training, free pencils, coffee, sick pay, maternity
leave……..
A
SHORT TAX EXAMPLE
Below is a brief example of how things
compare with the two corporate vehicles.
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PAYE
on drawings, dividend calculations or partnership share? You get taxed as
self-employed. This reduces your overall personal tax liability each year. PAYE
taxes at basic rate are 22%+11%+12.8%=45.8%. Self-employed rates are
22%+8%=30%.
The choice is up to you! – call us on +44(0)
207 719 8282 and talk your own
situation through with friendly staff who understand the issues
END