teamwork is natural
Many businesses may be better suited to a partnership model. We believe that all businesses – especially SMEs – should cultivate a ‘partnership ethos’. What do we mean by this?
What is a partnership?
In short, a culture of cooperation wherein all members of the team are truly invested in the success of the business. In such businesses, all team members can be appointed partners as it’s a question of purpose, not seniority. There is leadership rather than micromanagement, and job satisfaction comes from what is achieved rather than what is received.
Partnerships are more common than you think...
Partnerships are becoming increasingly popular as a business structure of choice for both new businesses and existing businesses, which can convert to LLPs to create a hybrid structure with an existing limited company.
between Limited Companies and Limited Liability Partnerships?
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.
Here to help
Want to set up a Limited Liability Partnership?
If your business has switched or is thinking about switching to a partnership model, you will no doubt have some questions about how your status, whether as a team member or a business owner, will change. As such, we’ve written articles below to help answer some of the most commonly asked questions so nobody gets left in the dark. We’ve also tried our very best to write as plainly as possible.
You will have the status of “partner” in the business. There will be increased transparency regarding business performance and profits, with regular meetings between representative LLP members.
All LLP members are actively encouraged to participate in and contribute to the business as a whole. You may be entitled to a share of any above-target profits and will thus participate more directly in the financial success of the business.
Whilst joining the LLP is not compulsory, the business will thrive from the financial benefits the “partnership model” offers and this will, in turn, benefit the LLP members through their profit shares and through the increased opportunities and investments afforded within the business.
You are not putting your mortgage application at risk. For the purposes of a mortgage application, LLP membership is quite similar to being a PAYE employee, but with the benefit of a profit share and increased transparency.
We regularly support many LLP members through the mortgage application process. All they ask is that you liaise with them to ensure that the correct boxes are ticked.
Depending on the lender, you may be assessed as ‘employed’ or ‘self-employed’ for mortgage purposes, and we will provide the documentation you need to evidence your income.
The way that “Partnerships” are taxed has always been on a “self-employed” basis and LLPs are treated in the same way. However, LLPs are a new construct (since 2001) and the law is rapidly evolving in the direction of treating LLP members as employees for most other purposes.
For example, the “Whistle Blowing Protections” (a Supreme Court decision in 2014) and Pensions Auto-Enrolment have ruled to treat LLP members in the exact same way as employees. Furthermore, we have ensured that all employee rights are preserved and are carried forward in the Partnership Agreement.
None – the only downside is an added administrative burden, most of which we will carry out for you. We are also available to help you, without charge, with personal tax and financial queries on a confidential basis.
No, “LLP” stands for “Limited Liability Partnership”. This means your total liability is limited to the investment you make in the Partnership in the first place.
No, that is the whole point of the Limited Liability Partnership.
Have more questions? We've got more answers below.
Helping you create and maintain a partnership model
We understand that switching to a new business structure can present some challenges. That’s why we assist not only with the LLP implementation process but also with the ongoing management of the LLP.
Even more of a partnership business
“The great thing is that Collin and I are on the same page from a cultural perspective, so we can still be the same company that we were when it was just me, him, and two others about fifteen years ago”, Andy explained, before adding “our business already had a lot of elements of the partnership model”.
From The Blog
Want to get a better sense of what it’s like having a partnership structure, we’ve carefully curated the below articles from our blog to give you some more information.