Whilst we've posted an article on joint ventures previously we haven't discussed the implications of running an LLP alongside a company. As this structure has become a common strategy for business owners we're now going to discuss this in our latest article.
Why have more than one trading structure?
This business model offers flexibility and potential tax benefits. However, it also comes with risks, especially following changes in tax legislation.
These rules attribute profits to individuals where HMRC perceive a structure is contrived and includes a combination of individual and corporate members in an LLP.
As a result, HMRC will challenge those arrangements they consider artificial or non-commercial. Therefore, careful planning is essential when running an LLP alongside a company.
Planning the structure -
There are several different setups that can be considered:
LLP plus service company
You might have an existing LLP and wish to join up with a company. For example, where your company handles payroll for your employees. Alternatively property may be held by a company because the partners wish to safeguard an asset.
Where an LLP sells its goodwill to a new company partners and itis leased back to the LLP this transaction will be scrutinised by HMRC. Those partners who control the company who is the recipient of the goodwill, will be treated as making a disposal chargeable to capital gains tax.
Furthermore, those measures introduced by HMRC may have a negative impact on this type of arrangement. Ultimately, any structure will only be effective where it is is commercially driven.
Company plus service LLP
Conversely, it may be beneficial to set up an LLP to run alongside a company which acts as it's service vehicle. The LLP can be formed very quickly and the partners of the LLP mirror the shareholders of the existing company. However, this is not essential.
Goodwill transfer to an LLP
An existing business can be retained in whole or in part within your company. However if you are looking to transfer this to an LLP there is no form of capital gains relief when a company teams up with an LLP. This is not the case where businesses are moved inter-company as part of a reorganisation or restructure.
A gift of assets (including part of the business) to an LLP could be made to shareholders in specie. Alternatively. there may be a sale of part of the business to the new LLP by using a formal sale agreement.
However it may not be beneficial to transfer part of your business to the LLP if there is existing goodwill in the company. This is because an LLP cannot obtain tax relief by writing down the value of the goodwill over time.
LLP with no goodwill transfer involved
If the newly formed LLP is not acquiring any of your company's business it can establish its own business. Additionally, it might be able to assume responsibility for some of your company's existing administration work and related costs.
It is helpful if the LLP also operates business activities independently of your company. As this reinforces the fact that your new structure is commercially driven. Furthermore, if your LLP has other clients, this reduces the risk of HMRC arguing it is an artificially contrived business structure.
Your LLP may recharge your company for it's services on an arm's length basis. However, what amounts to 'arm's length' is not easy to determine. Therefore, it would be prudent to compare prices in the market place for any equivalent services then use these as benchmarks.
LLP with one or more corporate members
Adding a corporate member to an LLP is a strategy has often been used by business owners to manage tax exposure. This structure can be effective when personal tax rates are high, and control needs to be exercised over profit extraction.
However, any planning is subject to HMRC's anti-avoidance legislation. These rules deem profit allocated to a corporate member as being taxed on the individual where they are connected with the non-individual, and they have the ability to enjoy the profits of the non-individual. A non-individual member includes a trust, a company or another LLP.
This planning can be effective where income tax is not the key issue and you're aiming to ensure a transfer of funds to a corporate member. Furthermore, this may be a useful tool for inheritance tax planning or managing your family's finances.
Running an LLP alongside a company - potential pitfalls
There are a number of potential pitfalls which you need to be aware of when implementing this structure. We have set out some examples of these below.
Associated company rules
Now they are two different corporation tax rates (20% and 25%) this is a potential issue, whereas this wasn't the case when there was just one rate.
Where an LLP consists of individual partners and corporate partners, the companies may all be associated with one another. This is by virtue of the fact that they are controlled by partners who are all each other's associates. What's more, this could be particularly onerous where a company's profits fall within the range of £50-£250K.
Car benefits
If your LLP provides motor vehicles to your company, great care should be taken careful when providing cars to members who are also directors. Additionally, this can include your family members engaged in either the company or LLP.
If not implemented correctly, This will result in taxable car and fuel benefits for the individuals concerned. This is because the cars may be treated as being made available to the directors or their families.
It's possible to avoid this issue taking various precautionary measures. One of these would be excluding directors or their family members from using any vehicles provided to the company.
However, if you are thinking of proceeding with this type of structure, you should be mindful of this leading tax case here.
Loans to participators and LLP's
HMRC perceived that LLP structures were being set up in order to circumnavigate the tax rules for directors loans. As a result, HMRC introduced anti-avoidance legislation to counteract such moves. As a result, HMRC apply a tax charge where a close company makes a loan or advance to:
Summary
Running an LLP alongside a company offers flexibility and some tax efficiency. However, you need to be mindful of HMRC's anti-avoidance.
In order to implement these structures successfully, you need to ensure the structure is commercially run. Furthermore, you should keep all arrangements clearly documented.
Last and by no means least(!) take advice before transferring assets, setting up service companies, or adding corporate partners.
For more useful information, check out our Ebooks here
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.