UK Limited Liability Partnerships (LLPs) are an increasingly popular choice for non-UK residents. They are a tax efficient vehicle for international trading purposes and combine the advantages of corporate status with limited liability protection. The income that is generated outside the UK is not subject to taxation in the UK if the partners are not residents in the UK. UK LLPs can be registered in less than a day, are inexpensive and have minimal annual compliance obligations.
Convention: For the remainder of this article, the following conventions apply
Limited Liability Partnerships will be referred to as LLPs
Limited Partnerships will be referred to as LPs
Limited Companies will be referred to as LTDs
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Definition
Definition: A partnership is defined as a business that is carried on together by two or more persons with a view to profit. An LLP is a partnership that is registered with Companies House and limits the financial liability of the partners. As a consequence of the registration, the personal assets of the partners are protected from the liabilities of the LLP in the same way that shareholders cannot be made to discharge the debts of a company in which they hold shares.
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The difference between an LLP and an LTD
- An LLP requires at least two partners, while an LTD can be established by one person who is both a shareholder and a director.
- The partners in an LLP are not required to be natural persons, while an LTD requires at least one director who is a natural person.
- The shareholders in an LTD do not have the right to manage a company—that is the responsibility of the directors, whereas all the partners in an LLP have the right to manage the business directly.
- An LLP does not have a constitution, whereas an LTD has a written constitution that is filed at Companies House and is available for inspection. LLPs will usually have partnership agreements, but they are not made publicly available.
- The partners in an LLP can easily join and leave, and most partnership agreements specify how this can be executed. However, shareholders own an asset (shares issued by the LTD), which has to be acquired from another shareholder or sold to a third party. If there are no buyers and sellers because the LTD is small, this can be very difficult, if not impossible.
- The profit sharing arrangements are usually flexible in contrast to the dividend structure of an LTD.
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Partnership Taxation
- An LLP is not a taxable entity. The income is received on behalf of the partners and is attributable to the partners, who then have to report their income to the tax authorities in their countries of residence.
- LLPs have to file a tax return each year. The purpose of the return is to notify HMRC of the LLP’s sources of income and gains and how they were divided between the partners.
- Non-UK resident partners do not have to pay tax in the UK on any income or gains that is not generated in the UK. It is this aspect of the UK tax law that makes UK LLPs so popular with non-UK residents.
- If the LLP’s income is generated in the UK and the partners are residents in the UK, the profits will be taxed at personal tax rates, which are higher than corporation tax rates. This makes it difficult for the profits to be retained for future investment in the business of the LLP.
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The following can be partners in an LLP
- Anyone who is over the age of 16, no matter which country they may be a resident of. However any person who is an undischarged bankrupt or was disqualified from being a director may not be a partner unless they have the permission of the Court.
- Any corporation, trust or other legal entity
- Non-UK resident persons, trusts or other legal entities.
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Compliance requirements
- An LLP has to maintain accurate and complete records of all its transactions and must be able to establish its financial position at any time.
- Annual accounts must be filed at Companies House within 9 months of its accounting reference date. The accounting reference date is usually the last day of the 12th month after which it was formed.
- A partnership tax return has to be filed to show how much profit each partner will be reporting in the UK, and how much is attributable to the non-UK resident partners.
- LLPs that do not qualify as small LLPs are required to have their accounts audited. To be considered as a small LLP, it must have met two of the following three conditions in two out of the last three years:
- The annual turnover should be £6.5m or less.
- The balance sheet total should be £3.26m or less.
- The average number of employees should not be more than 50.
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Designated Members
Designated Member is a legal term given to any partner in an LLP who gives consent to being designated and is selected by the agreement of the other partners. An LLP requires at least two of its partners to be designated members, and they can be individuals or corporate partners.
- The first designated members are named on the incorporation documents when an LLP is formed.
- In some cases, when an LLP is formed, the option to make every partner a designated member is selected. We provide that option in the formation process.
- Alternatively, sometimes only a few selected partners will be nominated as designated members. When forming the LLP, the individual designated members must be identified.
- Following incorporation, if the partnership does not make each new partner a designated member, Companies House must be notified when new partners are also designated members.
- The choice between the option of having all the partners as designated members or only selected partners can be changed using the form LL DE01.
- If the number of designated members falls below two, all the partners are deemed to be designated members.
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A Designated Member’s duties
Designated members are usually involved in the day-to-day running of a partnership because they have the following legal obligations and responsibilities:
- They must comply with all the UK tax legislation. Where applicable, partnerships have to register, operate and account for VAT. If a partnership has employees in the UK, it needs to operate a PAYE scheme. LLPs also have to submit partnership tax returns even if none of its activities are in the UK and its partners are outside the UK. Although tax may not be payable, a return still has to be submitted.
- They have to update Companies House with changes in the partnership. Hence, a change of PSC (Person of Significant Control) will have to be reported along with changes in the details of any partners or their status as designated members.
- They have to deal with the annual compliance obligations such as annual accounts and annual confirmation statements that need to be filed with Companies House.
- They have to appoint an auditor, if necessary.
- They are required to represent the LLP in legal matters.
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Partnership Agreements
LLPs are governed by the Partnership Act of 2000. Most partnerships have a written partnership agreement, although that is not a legal requirement. In the absence of a partnership agreement, the following default rules will apply:
- Partners cannot be forced to leave. The only way out of a failure to reach agreement is to dissolve the partnership.
- Each partner is entitled to an equal share of profits.
- No partner is entitled to a salary.
- Each partner must contribute an equal amount of capital to the partnership.
FAQs
Q. What happens if, after a dispute or death, there is only one partner in an LLP?
A. In the absence of any agreement to the contrary, the partnership can continue but must find a new partner within 6 months. If it fails to find a new partner, it will lose its limited liability status. The usual solution would be for the remaining partner to form a limited company and make the limited company a partner.
Q. Is it possible to create a partnership with just one person?
A. In theory, yes. You can create a solely owned LTD (Limited company) and make that company a partner with yourself as the other partner in the LLP. However, it is possible that such an arrangement could be treated as a sham, and the LLP could lose its limited liability status.
Q. Can an LLP be used for charitable activities
A. No. The definition of a partnership is that it is created with a view to profit which automatically rules it out as a charity.
Q. Can an LLP be dormant.
A. Yes. If it has no recordable transactions, it can be treated as dormant. Companies House filing charges and formation costs are ignored for this purpose. A dormant LLP will still have to file dormant LLP accounts.