LLP vs Ltd - Why might you choose an LLP over a limited company?

hello and welcome to our new Wilkin south of video I'm Chris Wilkins at Wilkins Southworth we always explore the problem to ensure that you get the most proactive and best tax advice why might you choose an LLP over a limited company numerous ways in which you can set up a business partnership limited company or sole Trader amongst these options are hybrids including limited liability Partnerships llps which incorporate elements of different setups as ever when it comes to taxation nothing is straightforward consequently it is essential to appreciate the pros and cons of llps and limited companies when setting up a business legal standing the legal standing of an LLP and a limited company are similar in that they are treated as separate legal entities from Member stroke shareholders they can sign contracts employee staff and property and be sued in a dispute the key is that the liability of members shareholders and directors will be limited to their capital investment into the LLP stroke limited company so from a legal standpoint there is not much difference between an LLP and a limited company flexibility there is greater flexibility with an LLP where members can change the share of profits management structure how decisions are made and how members are appointed and retire s of a limited company also have a degree of flexibility but this is dictated by the companies act 2006 which also has several restrictions while both entities are registered at companies house an LLP agreement is private while a limited company's articles of Association are available to the public distributions the subject of distributions payments to members and shareholders is one where the two entities have significant differences under an LLP structure profits at the end of the year are automatically distributed to members under a pre-arranged split limited companies have a different setup where profits can be retained or paid to shareholders as dividends based on shareholding double taxation double taxation is a common subject when looking at the pros and cons of llps against limited companies due to the way the llps are structured no taxes paid by the LLP instead income tax and capital gains liabilities are passed on to members when you consider that companies are susceptible to corporation tax on their profits and shareholders dividend tax on their distributions there is an element of double taxation taxation on profits the taxation of profits is an area in which llps and limited companies vary enormously regarding llps there is no corporation tax payment instead LLP members are liable to pay National Insurance and income stroke capital gains tax on their share of annual profits limited companies pay corporation tax on their profits starting at 19 for annual profits under 50 000 pounds a year tapering up to the standard 25 rate between fifty thousand pounds and two hundred and fifty thousand pounds a year companies making profits over two hundred and fifty thousand pounds per annum are charged corporation tax at the standard rate of 25 percent this is where the issue of double taxation emerges example of LLP and limited company distributions the best way to demonstrate the taxation of profit stroke distributions from an LLP and limited company is to show the breakdown via a bonus dividend and LLP distribution in this table we have calculated the net receipts from a gross three hundred thousand pound payment via an LLP vehicle which comes in at 159 000 pounds we also show the equivalent gross figures required to arrive at the same net receipts using limited company bonus and dividend payment methods [Music] [Music] [Music] as you can see when using either limited Company Route the gross payment required is approaching fifty thousand pounds more than an LLP in summary there is a significant difference between the effective tax rates for a net LP payment compared to a bonus or dividend distribution however profits from an LLP are taxed and distributed to members annually in contrast dividend stroke bonus payments are optional and can be retained within the company and paid at a later date at a time which may be more beneficial to the recipient from a taxation perspective benefits in kind there is an interesting anomaly regarding benefits in kind and how they are treated within an LLP and a limited company as a member of an LLP you are not officially recognized as an employee and therefore not liable to additional taxation for benefits in kind such as using a company car owned by the LLP the LLP is not your employer therefore National Insurance paid by an employer on benefits in kind is also null and void using a company car as an example an LLP is also able to offset Capital expenditures such as the cost of the vehicle up to 100 servicing petrol and insurance although excluding the cost of the vehicle only for the percentage of time which the vehicle is used for business purposes so if there's a 50 50 split between personal and business use then only 50 percent of the capital expenditure can be offset against profits as llps can employ individuals if the individuals not members have access to for example a company car and are remunerated under the paye system then both parties may be liable to additional charges related to benefits and kind where an individual has access to a company car via a limited company for business and personal use the tax situation is different there are still various Capital allowances which can be used to offset the purchase price of the vehicle but classed as a benefit in kind there are National Insurance liabilities for the company the employer has both National Insurance and income tax liabilities based on the value of the benefit in kind this value calculation will vary according to the cost of the vehicle type of vehicle and the emissions there have been numerous tribunal challenges involving hmrc and members of llps watch the space change in ownership the subject of a change in ownership is very different when looking at llps and limited companies but the simple fact there are no shares in an LLP if a limited company is sold a third party buys the outstanding shares and they become the owners with an LLP there are two options when looking to sell a business existing members resign and new members are admitted to the LLP in exchange for a financial settlement the assets Goodwill client base employees Etc within an LLP are sold funds realized and then distributed to members at which point the LLP is wound up on the surface llps and limited companies have much in common but when you dig deeper there are some significant differences [Music] summary there are various pros and cons when it comes to LPS compared to limited companies some of which have been listed above the recent increase in the standard rate of corporation tax has extended the potential value of llps for higher rate taxpayers however one of the significant potential drawbacks is that llps cannot retain profits from previous years distributions are taken monthly within a balanced payment at the year end when the total annual profits have been confirmed it's important that you take advice from your accountant as to the best setup for your business while taxation is obviously an important consideration there are many other factors to take into account if you have any questions regarding llps and limited companies then please drop a comment below and we will get back to you as soon as possible by the way don't forget to subscribe to learn about other videos in this series foreign [Music]

Channel: Wilkins Southworth Chartered Certified Accountants

Views: 9,995

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Id: 777XvUo-8eI

Length: 9min 43sec (583 seconds)

Published: Thu Jun 15 2023