Limited Liability Partnerships - LLP's

What is a LLP?
Forming a LLP
VAT
Employing People
Business Plans & Cash Flow
Tax and NIC

What is a LLP?

In simple terms a LLP (Limited Liability Partnership) is a structure in which several individuals agree to work together, and tell all those that will interface with them (customers, suppliers etc) that they are a limited liability partnership.

The key difference between a partnership and a LLP is that provided certain obligations are fulfilled the members’ liabililites (Note that participants in a LLP are known as members rather than partners) can be limited to their contributions to the LLP and personal assets are protected. Unlike a sole trader or partners in a partnership the private and business affairs of the partners are separable; the LLP in an independent legal entity.

A limited liability partnership is usually formed because there is a need for more than one person’s skills; be they the same or complementary. Setting up business as a limited liability partnership is similar to setting up a company, and is not as easy as a simple partnership.

See below on Forming an LLP

Obligation No. 1

All members must inform Revenue and Customs within 3 months of becoming self employed; as always with Government, there are penalties for failing to inform them.

It is a simple process, either go to the web site below or telephone your local tax office. www.hmrc.gov.uk/startingup/index.htm

From the date you become self-employed you have to pay class 2 national insurance. This is a fixed amount regardless of the business profitability and it is usually paid weekly. See Tax Rates and Limits elsewhere in the ESA for current levels.

Being a limited liability partnership means that members as private people and the members as business persons are seen as one and the same for tax and national insurance charges.

Obligation No. 2

Members will need to file individual self-assessment income tax returns each tax year. The income tax year runs from the 6th April to the 5th April following. It is probable that Revenue and Customs will send self-assessment forms automatically, If they do not, there is still an obligation to pay tax so you would need to let them know. The following site is useful: www.hmrc.gov.uk/individuals/tmaself-assessment.shtml

LLP trading details and accounts must be filed with Companies House (much like a Company) in addition to each member completing an income tax self-assessment to Revenue and Customs.

Forming a LLP?

An LLP is an incorporated entity (like a company), and has to be registered with Companies House. To be formed, at least two persons must agree to carry on a business with a view to profit and put their names on an incorporation document. Unlike a company a LLP does not have any share capital and does not need a memorandum and articles of association. The internal affairs of a LLP are usually agreed in a member’s agreement entered into as the LLP is formed.

It is vital to consult a professional advisor when drawing up a member’s agreement.

A form LLP2 must be completed and sent to Companies House (naturally with a registration fee). This form must identify at least two members who will be “designated members”, who have obligations similar to those of a company secretary. The form can be obtained from Companies House (See the web site below). The Registrar of Companies will issue a certificate of incorporation of the LLP.

Changes to members need to be submitted to Companies House using form LLP288a for new members and LLP288b for terminations.

Just as for a company there is an obligation for a LLP to keep accounting records and file accounts. The accounts will be in public domain. It is thoroughly recommended appropriate advice is sought from a professional advisor in dealing with this area.

Companies House provide a very helpful web site giving more details on forming a LLP as well as responsibilities of Designated Members at www.companieshouse.gov.uk/infoAndGuide/llp.shtml

VAT

If or when the turnover of your business (the value of your sales to your customers) exceeds a particular level, you may need to register for VAT purposes. The registration level varies from time to time (usually at the time of a budget) so see Tax Rates and Limits elsewhere in the ESA for current levels, or go to the Revenue and Customs site at www.hmrc.gov.uk/businesses/ and click on VAT.

Operating VAT should not be treated trivially and a full discussion with your professional advisor is strongly recommended. The operation of vat is in principle simple:

On sales to your customers you charge and collect VAT – known as OUTPUT TAX
You deduct the VAT you have been charged by your suppliers – known as INPUT TAX
You pay to or receive from HM Revenue and Customs the difference

Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The most common approach is to use the standard VAT scheme; however HM Revenue and Customs allow some special schemes i.e.

Cash Basis Scheme
Flat Rate Scheme
Annual Scheme

For the standard scheme VAT is accounted at the tax point date shown on invoices raised or received.

The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out.

The Flat Rate scheme relieves that business of having to record the VAT on every individual sale and purchase transaction, but allows the VAT payable to be calculated as an agreed percentage of the VAT inclusive turnover. The business is still required to provide VAT invoices to all its customers.

Certain conditions must be fulfilled before you can use the Cash Accounting or Flat Rate schemes, please check with your Professional Advisor before making a decision.

VAT returns are required to be sent to HM Revenue and Customs periodically. The most common is quarterly, however in special circumstances monthly returns can be filed or a single annual return (Annual Scheme). Note that the Annual scheme does not mean you only make a VAT payment once a year, an agreed amount is paid quarterly and the final payment must reflect any correction to come to the amount shown on the annual return.

Again proper advice should be sought before moving to one of the schemes.

Employing People

As a limited liability partnership you can employ people, you will need to inform Revenue and Customs that you are doing so. A helpful web site is www.hmrc.gov.uk/employers/first_steps.htm

Legislation with respect to the obligations and relationship between Employer and Employee has been growing considerably over the last years. All employees must have a signed contract of employment, proper care must be taken to ensure there is a safe and healthy place of work and that the employee is properly trained in working safely. It is good practice and commonly expected to have in place an induction program for a new employee as well as an appraisal process linked into development and training programs. A good place to get some advice in this area as well as other business support is the local Business Link office or the Business Link web site www.businesslink.gov.uk/

Business Plans and Cash Flow

Just as with any business it is wise for a limited liability partnership to ensure that there is a plan before starting trading, after all the members may be moving from employment with a regular income, to an income based upon when customers pay and having perhaps already paid amounts to suppliers or incurred debts to them.

A business plan and a cash flow forecast are essential.

A business plan is a blue print for your business, and should layout how you will achieve your business goals. It is sometimes seen as something only to be written if seeking finance and whilst it is fundamental to that process it is also fundamental to keeping your business going in the direction you wish. It does not necessarily have to be a lengthy document, as long as it conveys what you are doing and how you are going about it. There is much help available in preparing business plans and a good place to start may be talking to your bank. But to help you think through the issues go to the Business Planning section of the ESA and perhaps use the downloadable tool.

A cash flow forecast deals with knowing when you will receive cash and when you will need to pay out cash and when you might need to find additional cash to keep going. IT IS VITAL; again your Accountant, professional advisor or bank can help, but you can look at our Cash Flow Forecast section of the EAS and even use the tool provided.

Tax and National Insurance for Limited Liability Partnerships

Income from a limited liability partnership's business activity will be divided between the members in an agreed manner. Each member is then subject to income tax. Just as when in employment, a personal allowance for tax-free income is available. In addition to the fixed class 2 national insurance, a further class 4 national insurance charge is applied as a percentage of the taxable profits.

Where the LLP employs people, then the LLP must operate PAYE (pay as you earn system); deducting at source the Income tax and national insurance its employees owe and paying them over to HM Revenue and Customs. Employee costs are deducted as business expenses and this includes the employer’s contribution to national insurance for all employees.

Taxable profits basically are calculated by deducting business expenses from the sales income. However the calculation details of particular partnerships taxable profits are unique and assistance from a professional advisor is recommended.