LLP status could fix it for Bob the Builder

THE first examples of an entirely new species of business animal are beginning to appear, after a gestation period that can be measured in years rather than months.

From April 6 this year it has been possible for business activities to be carried on through a new kind of legal structure called a limited liability partnership, or LLP.

These new beasts have a number of characteristics which are likely to make them more attractive for business people than ordinary partnerships or limited liability companies.

These new limited liability partnerships have a lot more in common with limited companies than with partnerships. A partnership can be formed and operated with the minimum of formality - no written agreement is required, although it is always sensible to have one.

The partners in a partnership are, for all practical purposes, treated as carrying on their business as individuals, so that they retain individual liability for the business debts, and are taxed directly on the profits of the business.

The disadvantages of unlimited personal liability of partners encourages the use of limited liability companies as the main vehicle for carrying out business activities in the UK.

Although the liability of the company itself for its debts is unlimited, the liability of the shareholders is limited to the amount of capital which they contribute.

Limited liability companies do bring some disadvantages. In the first place, the price of limited liability is the requirement to disclose the financial position of the business by filing annual accounts.

PERHAPS more significantly for many businesses, there is a distinct taxation disadvantage in operating through a company compared with a partnership, particularly where all of the profits of the business are to be distributed to the owners. The top rate of income tax is 40%. Small companies pay corporation tax at a rate of 20%, large companies at the rate of 30%.

When a company's profits are distributed to its shareholders, they are charged an extra layer of tax that takes the effective rate closer to 50%.

It also has to be borne in mind that employer national insurance contributions, currently at a rate of 11.9%, have to be paid on all salaries and wages paid by a company, including those paid to shareholder directors.

LLPs combine the advantages of limited liability for the shareholders of a company with the taxation advantages of an ordinary partnership.

The members of an LLP have no liability for the debts of the LLP, but are still taxed directly as if they were partners in the LLP's business.

As with limited companies, the price of protecting individual assets is the requirement to file accounts.

LLPs were devised initially to meet the concerns of partners in large firms of accountants, who faced the spectre of personal bankruptcy following some high-profile collapses, such as Maxwell and BCCI, which then led to large negligence claims against the accountants.

Although many accountants and other professionals have already decided to take the plunge and become LLPs, they are not the only ones who may benefit from adopting this new business structure.

When starting any new business activity it is necessary weigh up the advantages and disadvantages of each different structure before deciding which is best.

For Bob the Builder the choice is no longer between Bob the Builder & Co and Bob the Builder Limited. Bob the Builder & Co, LLP, may provide the most effective structure, combining the advantages of limitation of liability and lower tax take.

Ian Gordon is a Corporate Partner in McGrigor Donald. The UK law firm has offices in Glasgow, Edinburgh, Belfast, London and Brussels

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