The addition of a limited liability partnership structure to an existing company can enhance rewards to key individuals in the business.
A limited liability partnership (LLP) is a transparent structure from a tax perspective. This means that a company can transfer part or all of its trade to an LLP without any tax impact on the company. Shareholders who continue as directors or employees of the company will continue to be entitled to CGT entrepreneurs' relief on a disposal of the company shares subject to satisfying the necessary conditions.
What are the benefits?
A key benefit of this type of company/ LLP structure is being able to provide key individuals with a stake in the underlying business without disturbing the share ownership in the company. This can be the case where family businesses are unwilling to dilute their shareholding in a company, yet recognise the advantages of providing long-term incentives to staff.
The advantages can be summarised as follows.
- Increased flexibility in incentivising and rewarding key team
- Adaptability in amending profitsharing ratios on an annual basis
- Delayed tax payments giving cash flow benefits
- Different rates of national insurance, providing an approximate 9% payroll saving
- Flexibility in altering members of the partnership
- Tax relief on loans to the LLP.
When is this structure relevant?
The use of an LLP is most beneficial where you have most, or all, of the following characteristics.
- Total payroll cost of £500,000+ for the key team
- Relatively inflexible shareholding Structure
- Desire to incentivise key team.
What is involved in putting this into place?
Stage 1 - feasibility
Identify whether or not the idea is relevant, concentrating on:
- suitability
- analysing costs v benefits.
Stage 2 - project plan
This incorporates a timeline for the advice and implementation, identifies and appoints the appropriate advisers (tax and legal) and sets out the key deliverables.
Stage 3 - implementation
All regulatory matters are covered, meetings are arranged with the individuals involved, and all tax and legal matters identified are dealt with.
Stage 4 - ongoing review
Review regularly to ensure that the structure remains compliant with any changes in employment or tax law.
What are the costs of the planning?
The total costs of advice and implementation vary depending on the nature of the work to be done, but as a guideline they should not exceed the tax and cash flow savings in the first 12 months after implementation.
Additionally, the advice is provided in such a way that if the feasibility stage produces a result that is detrimental to the planning, the costs are capped at an early stage, and for a significantly reduced amount.
How safe is the planning?
There are two risk areas that need to be considered.
Employee
The key individuals are giving up their rights as employees. As a partner, they are self-employed and will not enjoy the same employment rights. This needs to be understood and accepted by the individuals involved. However, the reality is that there is little erosion of effective rights, and with effective communication of the facts, this risk is easily overcome.
Company
This type of commercial planning has been used for many years, and numerous professional firms (including Smith & Williamson) have altered their structure to include LLPs. The benefits are primarily HR based and the planning falls squarely within existing tax legislation.
If for any reason there was to be a change in tax law, then the planning can be easily and quickly reversed without any adverse tax consequences.
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.