The Demise of the LLP?
Over recent weeks I have heard increasing noises about the death of the Limited Liability Partnership (LLP). The commentators highlight factors such as the higher rates of income tax and the frequency by which partnerships have converted to companies. The legal profession is often cited as a further reason for the demise of LLPs. The alternative business structures (ABS) in which lawyers can now operate, permit legal firms to transact through the medium of a company. This has aided the expansion of quoted law firms and has facilitated incorporation of law firms which previously were partnerships.
Even as recently as 25 October 2013, HMRC issued tax legislation that detracts from professional practices operating as partnerships. Prior to that there has been discussion about HMRC taxing partners in partnerships as if they are employees. All of this suggests that the direction of travel is away from LLPs and into companies. Incorporation of partnerships can lead to tax planning where the partners extract value out of the partnership at a rate of 10%. There have been many tax-driven incorporations which use this technology.
Despite this I am not so pessimistic about the demise of LLPs. They are well understood and commonly used vehicles in areas other than professional practices. Even in professional practices they have one very substantial tax advantage over private companies. When it comes to succession, partners can be brought through the ranks without a tax cost. Bringing in the next generation of shareholder in a company can be very difficult to implement unless the individual included is willing to suffer a tax cost. Another benefit of partnerships is that Partnership Agreements can allocate partners rights to income and rights to asset ownership in different proportions. This flexibility is difficult to match in a company.
Finally, a non-tax reason which suggests the continued existence of an LLP is the partnership ethos. The thought that “we are all in it together” helps prevent dysfunctional behaviour that can be found in more structured, corporate, environments.
As a tax practitioner with a client base including many partnerships I do not see the demise of the LLP and am looking forward to a long and fruitful career advising them.
