Until 2001, when people wanted to set up in business, they had to decide between setting up as a Limited Liability Company or in partnership. Both the commercial implications and taxation treatment differ significantly between the different types of organisation.

Now, there is a third way. It is possible to get the best of both worlds by creating a Limited Liability Partnership. These are becoming increasingly popular and common in the professional sector with accountants, solicitors and surveyors converting into Limited Liability Partnership status by the thousand.

Commercial Considerations

When compared with a partnership, an LLP has limited liability status. For tax purposes though, it is treated in almost exactly the same fashion as a partnership.

An LLP maintains the flexibility of partnership arrangements. It means that it is very easy to introduce new partners and retire old partners.

Taxation Considerations

Advocates of LLPs believe that they have significant tax advantages over companies. This is one of the reasons why so many partnerships in particular are converting into this vehicle rather than companies.

LLPs are completely transparent for income tax, capital gains tax and inheritance tax purposes. This means that there will be no hidden tax charges, for example on the sale of a major asset. This also makes it very attractive for joint venture arrangements, for example where a builder and a financier get together to develop a property.

Creating An LLP

Typically, a great deal of planning must go into the creation of an LLP to ensure that everything runs smoothly. This is particularly the case where an existing partnership or company decides that it wishes to convert to this status. The wise will probably allow anything up to two years to ensure that there are no hiccups along the way although typically, six months to one year is more common.

Reasons for Converting

In most cases, the primary reason for converting is the ability to obtain limited liability. This means that if a disaster occurs, the liabilities for each of the partners will be limited to an amount of capital that they may have put up.

The other area where the LLP vehicle works far more efficiently than a company is succession. This is particularly facilitated, as it is so easy to convert employees into partners whereas turning employees of a company into shareholders can create significant complications. These include a greater likelihood of tax liabilities for existing owners. Further, inviting someone into a partnership will typically be a tax neutral event, which is almost certainly not the case where employee share taxation is concerned.

Conclusion

When any business is about to set up, it should not only be looking at whether it should become a company or a partnership but also whether a limited liability partnership is the most appropriate vehicle. Going a step further, if one is starting up from scratch, it is hard to see why anybody would want to take the risk of having a partnership with unlimited liability where this new vehicle is available.

In addition, where one is already operating a partnership, it will be foolish not to consider the possibilities of converting to limited liability. Your house could depend on it.