A summary of the main advantages and disadvantages of both
Each structure has advantages, the choice is ultimately driven
by your objectives such as profitability, tax and future
In our survey, nearly half of respondents said that they were
considering changing their business structure. We therefore thought
it would be helpful to set out a few advantages and disadvantages
about two widely used structures for financial services businesses:
a company and a limited liability partnership (LLP). The choice
between the two structures depends on numerous factors such as
commercial convenience, tax and future succession/exit.
Below is a summary of the main advantages and disadvantages of
As companies have distinct shareholders and employees, each may
have different interests. These can be aligned by giving employees
a share either as options or by using different categories of
shares, with each category having varying rights. The share classes
might, for example, prevent the owners giving up more of their
value than they might wish, while still keeping management
However, issuing shares in companies is complicated compared to
using an LLP. For example, the Articles of Association may need to
be amended as well as possible tax/NIC costs. A shareholders'
agreement may be also be required. With an LLP, there are fewer
formalities to bringing in new members. In order to maintain a
similar distinction, LLPs have the option to issue income and full
capital shares; with new members enjoying just a share of the
profits. Company share options can, in some cases, be replicated in
an LLP. With both entities, incentive arrangements need to be
structured correctly in order to avoid future problems.
From a taxation perspective, there are several considerations; a
key one is whether you need to draw all income earned. If you are
interested in rolling up retained profits, thus building value,
then a company may be the best choice as, from 1 April 2012, you
are taxed on profits at an average rate of between 20% and 25%. If
you want to draw all or most of the income from the business then
an LLP may be better as there is likely to be less taxation
overall, even with an effective rate of tax/NIC of 52%. The key
point is that LLP profits allocated to individuals are taxed at
high personal tax rates, even if the profits are not drawn down.
One solution might be to have an LLP with a corporate member. The
rationale is that you can take what income is needed from the LLP
and roll up the remaining profits in the corporate entity.
From an individual perspective, directors and employees of a
company must pay PAYE and national insurance each month on their
salaries. For those individuals who are also shareholders, it is
often possible to reduce tax costs by extracting profits as
dividends, though these are non-deductible to the company. A member
of an LLP does not suffer PAYE but income tax will be due in
January and July each year. The LLP should have lower NIC costs
overall compared to a company.
Each structure has advantages, some of which are covered in this
article. The choice is ultimately driven by your objectives such as
profitability, tax and future strategy but we can assist you in
making the right choice for your situation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
If a contractual clause is regarded as penal, it will be unenforceable. The paradigm case in which this arises is where the contract provides that if a party breaches its contract, it is to make a payment to the other party that is regarded as excessive in law.
The Supreme Court has reaffirmed the "proper purpose" rule holding that directors who had imposed restrictions on shares pursuant to a legitimate power to do so had nonetheless imposed them for an improper purpose.
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