The last year has been tough on many businesses. Some are still feeling the effects of a decline in profits and cash flow from the pandemic and subsequent lockdowns as they try their best to keep their business running. Others may just be starting to climb out of the despair that was Covid. What about you? What is your business’s current financial position?
Although there has been some respite from lenders and HMRC schemes, there may well be a critical time soon where creditors, such as HMRC themselves, have not been paid due to lack of current funds. In the case of HMRC, they may well be aggressive in their approach to reclaim the debt, and possibly even threaten a winding up petition.
These demands may be unreasonable and even unattainable in the current climate, but remember that it’s in HMRC’s, and the taxpayer’s best interest for the debt to be paid and the business to continue trading. To help better safeguard the future of your business, why not consider whether your business is suitable for the partnership model and, maybe, set up a Limited Liability Partnership?
What is a Limited Liability Partnership?
Partnerships have existed since the Medieval times in Europe, and are still a popular business model. However, despite their long history, the status of a partnership can still be confusing when it comes to tax treatment. Limited Liability Partnerships (LLPs) are one of the recent types of partnership models to be established with only two decades of history within the UK tax system. Maybe this is why there is still so much confusion surrounding it?
The beauty of the Limited Liability Partnership structure is the transparency in tax treatment, meaning that the partnership is not itself liable to tax, but the partners are taxed personally on their share of profits. Moreover, LLPs do not usually pay Corporation Tax. This not only makes the business more financially efficient, but also allows greater flexibility within the decision making process while running the business.
When we look at the effects from a partner’s point of view, we can observe two different tax treatments. On one hand, a partner will receive regular drawings from the business in the same way they would have a monthly net salary through PAYE, the only difference being that drawings are not taxable income. On the other hand, at the end of the tax year, a partner will be liable to pay income tax on their share of the profit only, as well as contribute to their national insurance.
If you operated as an LLP during the pandemic this would likely have been a significant benefit. As pay to Limited Liability Partnership members is only taxed when you make a profit, if your business is making a loss you pay no tax or Class 4 NICs. Whereas, pay to employees is taxed under PAYE at the same rate regardless of whether the business is making a profit or a loss. However, this isn’t just a benefit to the company going through a global crisis but rather a core feature of the business structure.
Therefore, operating as an LLP benefits from organisational flexibility, limited liability, and is subject to a lower tax burden. In addition, LLP members can retain their statutory benefits similar to those of a limited company employee, while benefiting from the tax efficient treatment of the partnership structure.
You need to cultivate a partnership ethos in your team
Although running your organisation as an LLP may make financial sense, you need to also approach it from the perspective of company culture. It is common for small businesses to be particularly suitable for the partnership structure as there is a lot of weight placed on everyone’s contribution, cooperation and trust in your team. There is just not enough time in the day, energy or resources for micro middle management, and this is a good thing.
Operating as an LLP means that everyone in the team feels like they have an equal stake in what is happening at work. The team turns from employees to partners, working towards the same goal, prepared to go the extra mile. And when employees are happy at work, customers benefit too.
When done right, Limited Liability Partnerships can be extremely beneficial for your business and it is worth considering this type of structure. To learn more about the partnership framework and whether it’s right for your business, click here. Alternatively, get in touch with one of us by clicking the big ‘Get In Touch’ button in the top right corner.