Chapter 2 Limited Liability Partnerships Flashcards
2.2 Formalities on setting up
Two or more persons (initial subscribers) must deliver an incorporation document. The subscribers of an LLP are known as members, members can join and leave provided there are always 2 members, there is no maximum number of members. LLPs must have at least two designated members, they are similar to directors of companies. They are responsible for the management and filing notices with the registrar, filing accounts and appointing auditors if required.
2.3 Members of an LLP
The rights and duties of members are in accordance to the members agreement. Each member is an agent and may bind the LLP. The member’s interest is the share capital of the LLP, each member’s interest must be separately analyzed and show the following:
• Capital contributed by each member
• Loans to the LLP by each member
• Monies owed by the LLP in respect of profits for each member
• Any other amounts contributed or withdrawn by the member
2.4 Tax Implications
LLPs are taxed in the same way as partnerships, all members are generally treated for the purposes of income tax. The profits of a trading LLP are subject to income tax based on each member’s share of the profit. Member’s salaries are not deductible in arriving at taxable profits of the LLP. A trading LLP must file a partnership annual tax return in a similar manner to a general partnership, the individual member must also file their own tax returns.
LLPs are subject to class 4 National Insurance contributions payable by each member, and each member is liable to class 2 NICs where their earnings exceed the small profits threshold. LLP profits qualify as relevant earnings for pension purposes.
Where the exceptions apply, the LLP will not be treated as transparent and will instead by chargeable to corporation tax on its income and gains as if it were a corporate body, in this case members are not subject to income tax on their share of the profits. The exceptions are that the LLP:
• Does not carry on a business with a view of making profit (not for profit organizations for example)
• Is in liquidation or is being wound up by the order of the court.
However, where the LLP:
• Only temporarily ceases to carry on a business with a view to profit, or
• Is being wound up and the period of winding up is not unreasonably prolonged and the winding up is not connected in whole or in part with the avoidance of tax
Then the LLP will continue to be regarded as a partnership.
2.5 LLP Losses
A member of an LLP has limited liability for the debts, the liability is limited to the amount of capital they contribute to the LLP plus any further amount agreed. For tax purposes loss relief claims are restricted for members of a trading LLP to each member’s contribution to the LLP. The member’s contribution means the capital introduced into the LLP by the member plus any further amount the member has agreed to pay in the event of being wound up.
Cumulative sideways loss relief/capital gains relief for LLP losses cannot exceed the member’s contribution to the LLP. There is no restriction on the relief available for LLP losses against trading income from the LLP.
2.6 Disguised employment within LLPs
Members of LLP are self-employed, however HMRC consider some of the members are actually deemed to be employees.
Legislation – where a member meets all three conditions of the legislation, the member is treated for tax and NIC purposes as being employed by the LLP. Income is treated as employment income and PAYE is applied as normal. The LLP receive a deduction for the salary and associated employment costs in their taxable trading profits for the period. The conditions are:
• Condition A disguised salary – if a member performs services personally for the LLP in the capacity of member, it is reasonable that at least 80% of the total amount paid by the LLP to the individual will be disguised salary. An amount is disguised salary if it is fixed, or variable but without reference to the overall profits, or it is not affected by the overall profits
• Condition B non-significant influence – if the mutual rights between the members and between the LLP itself and its members do not give the member significant influence over the affairs of the LLP. If the member does not have a significant say in the running of the business as a whole
• Condition C no significant investment – if the member’s contribution is less than 25% of the total amounts of disguised salary. Contribution means capital and long-term loans which cannot be withdrawn from the LLP while the individual remains a member without the consent of the other LLP members.
2.7 Capital Gains tax
Each member owns an underlying share of each LLP asset. The member is reliable for the share in each capital gain. The gain is eligible for rollover relief is a replacement asset is found within the rollover relief period. LLP members can also claim business asset disposal relief, where conditions are met. Where the LLP is subject to corporation tax, the members are not subject to a capital gains tax on their share of the gains.
2.8 Transfer of a partnership to an LLP
There is no cessation of trade and no balancing allowances or charges. The LLP will take over the plant and machinery at TWDV. There will be no triggering overlap relief. This is provided that the same trade is carried on by the new LLP and there is not a demerger. For VAT purposes the transfer is treated as a transfer of a going concern and is outside the scope of VAT.
