Benefits of Limited Liability Partnerships (LLPs)
Following on from our Sole Trader Vs Limited Company article, the LLP is worthy of a special mention.
Getting the best of both worlds
With the correct setup, most businesses can effectively get many of the benefits of a sole trader/partnership, namely:
- Offset trading losses against other personal income
- Taxed on capital gains just once, at 10%/18%, plus the annual exemption
- Expensive cars for key individuals without being heavily penalised for tax
...along with most of the benefits of a Limited Company, such as:
- Taxed on trading profits reinvested at only 21%
- Limited liability status
- Credibility
The way to do this, is through what is known as a corporate partnership.
In its simplest form, you (Joe Bloggs) setup JB LLP. LLPs require two partners. You personally are one partner, and the other is JB Ltd, a Limited Company you set up and 100% own.
If drafted correctly, the majority of the trading profits can be allocated to the Limited Company, whilst trading losses and capital gains will fall on the individual. Also, as a partner, you can potentially have an expensive car with the non-personal mileage proportion of running costs being a deductible expense.
LLPs of course also benefit from limited liability, and at least as credible (albeit considered by many a bit mysterious) as the Limited Company.
So what am I waiting for?!
You may now be wondering where the catch is. Why doesn't everybody trade in this way.
In our opinion it is almost always the best structure from a purely tax perspective. It does, however, require a little more administration, as even in it's simplest form, there is an LLP, a Ltd Co, and a self employed partner individual. It is, therefore, not really worth the effort for very small businesses, as any benefits would be wiped out by the costs of setting it up/running it.
It is also absolutely imperative that the partnership agreement is drafted correctly. It must be worded very precisely to ensure various profits and losses are apportioned in the correct way. Sure, you can probably find an online formation agent who'll knock you out an LLP for under £50 as you can with a Limited Company, but it certainly won't do what you want.
