Everyone is focused on profits and on doing what is best for the business. Partners are typically entitled to a share of the profits so there is a real sense of cooperation and common purpose.
Partners are typically entitled to a share of the profits of the business whilst receiving regular drawings each month. Unlike a salary, a variable profit share shouldn't be seen as a cost to the business, as the individuals are generating this excess profit through the incentive of participation.
All team members are encouraged to share their views and opinions, as well as participate in making business decisions. It's a question of purpose, not seniority.
LTDs and LLPs are two types of business structures that can be incorporated under the Companies Act 2006 or the Limited Liability Partnership Act 2000 at Companies House. In the UK, the LLPs Act 2000 enabled LLPs to be formed from 2001 onwards, providing the benefit of limited liability protection to all LLP Members, or partners, in a partnership, similar to the protections afford to LTD company shareholders since 1855. This means people can now become partners in a business without exposing themselves to unlimited personal liability. The use of an LLP structure not only offers the cultural benefits of a partnership, which are manifold, but also financial benefits. Compared to this, LTD companies also provide less flexibility in internal management structures and how profits are taxed. Therefore, an LLP is a hybrid of a limited company and a traditional partnership, which is designed to combine the best of both worlds, limited liability with organisational flexibility and tax transparency of a partnership business.
A limited company pays corporation tax on its profits (currently at 19%), however when these profits are distributed to shareholders as dividends, they are taxed again as income for the shareholder (currently at a rate between 7.5% and 38.1% depending on the shareholder’s total income). Therefore, LTD profits distributed to shareholders can be taxed at up to 57.1% altogether.
On the other hand, LLP members are treated as self-employed for tax purposes. LLPs are tax transparent, so the entity itself does not pay tax, but the partners pay tax on their share of the profits. LLP profits are taxed at the same rates as self-employed income with the combined tax and NICs rates ranging between 29% and 47% depending on the partner’s total income.
Although in many situations an LLP structure will be more tax-efficient because it prevents double taxation situation, the rate of corporation tax is lower than certain income tax bands so it’s best to get in touch if you have any questions about what structure may be best for you.
We will discuss and help you collect the scoping information required to implement the LLP model. We also support team presentations where we can help go through the benefits of the partnership structure, administrative requirements and also speak to the team on a one-to-one basis to answer any questions they may have.
We also provide ongoing assistance with all matters relating to the LLP, such as payroll, VAT, accounts, partnership returns and personal tax returns.