This is our most popular package with UK residents, and includes:
The filing and registration of your LLP
The submission of forms detailing the LLP's executive members (partners)
Incorporation forms (Form LLP2) do not require the signature of a Notary Public
The formation of your LLP within 4-6 working days
PPayment of legal and initiation fees
The appointment of your own candidates as members for the LLP (a minimum of two people are required)
The following documents will be posted to you (these documents will be sent via Royal Mail):
The original laminated Certificate of Registration
A hard bound copy of the Combined LLP Register
A hard bound copy of the Partnership Agreement
The Minutes of the First Members' Meeting
Membership Certificates and completed Members' Register
Premier Package
£ 175.00
Renewal fees from £50.00
This is our most popular package with EU residents, and includes:
The filing and registration of your LLP
The submission of forms detailing the LLP's executive members (partners)
Incorporation forms (Form LLP2) do not require the signature of a Notary Public
The formation of your LLP within 4-6 working days
Payment of legal and initiation fees
The appointment of your own candidates as members for the LLP (a minimum of two people are required)
A A registered office address for 12 months, provided by Coddan
An application form for the following year's renewal of the Registered Office Address service (£50.00)
Annual Return and Annual Account reminder
The following documents will be posted to you (these documents will be sent via Royal Mail):
The original laminated Certificate of Registration
A hard bound copy of the Combined LLP Register
A hard bound copy of the Partnership Agreement
The Minutes of the First Members' Meeting
Membership Certificates and completed Members' Register
Deluxe Package
£ 425.00
Renewal fees from £300.00
This is our most popular package with overseas residents, and includes:
The formation of your LLP within 4-6 working days
Payment of legal and initiation fees
A A registered office address for 12 months, provided by Coddan
An application form for the following year's renewal of the Registered Office Address service (£50.00)
A LLP nominee designated members service for 1 year
The names of the nominee designated LLP members will appear on the public record
Annual Return and Annual Account reminder
The following documents will be posted to you (these documents will be sent via Royal Mail):
The original laminated Certificate of Registration
A hard bound copy of the Combined LLP Register
A hard bound copy of the Partnership Agreement
The Minutes of the First Members' Meeting
Membership Certificates and completed Members' Register
A General Power of Attorney signed by the Nominees
A pre-signed, undated letter of resignation from the Nominee Members
An indemnity Letter for the General Power of Attorney
A nominee service agreement which provides for the indemnification of the nominees
LLP Creation Checklist: Legal Requirements
Setting-Up LLP: You have to register with Companies House, the method is similar to registering a company.
LLP subscribers may be residents outside the UK.
A LLP must exist for business purposes: it is a for-profit legal form.
Membership: the only members are the partners.
Partners must be individuals or corporate bodies.
The minimum number of partners are TWO.
New partners are normally admitted by the existing partners.
Partners can be of any nationality.
The business is controlled by the designated members.
A LLP can hold property.
A LLP can borrow money in its own name.
An LLP will be required to appoint at least 2 designated members.
LLPs that do not carry on business as a trade or profession such as an investment company will be subject to corporation tax.
The LLP is required to have a registered office in the UK.
(click here for other packages)
LIMITED LIABILITY PARTNERSHIP FORMATION IN THE UNITED KINGDOM
The limited liability partnership is a relatively new type of entity form available in the United Kingdom. Its introduction filled a gap in the range of entity types available in the United Kingdom by providing a structure which is as flexible as a partnership while offering limited liability to its members.
Although a distinct legal entity, a limited liability partnership is not subject to any corporate income tax, rather, partnership profits are distributed to its members, according to a pre-arranged formula codified in the partnership agreement, who pay personal income tax on their income from the partnership.
Coddan offers a comprehensive range of options to assist you in forming a limited liability partnership in the United Kingdom. Our limited liability partnership formations in the United Kingdom typically take between four and six working days to effect, and start from just £125. We also provide a wide range of related and post-formation services designed to facilitate the efficient running of your business.
A limited liability partnership is a legal entity form offered in the United Kingdom which limits the liability of its owners and members. This form of business entity is roughly equivalent to a hybrid between a partnership and a limited company, operating under a combination of partnership and company law.
A limited partnership formed in the United Kingdom overcomes two perennial problems associated with traditional partnerships whose liability is not limited: mutual agency of a partnership leading to joint and severable liability between the partners, and, unlimited liability of individual partners exposing their own wealth and personal assets to the same risks borne by the partnership's assets.
Instead of issuing shares to raise funds, the members of a limited liability partnership are its investors and are issued interest certificates which reflect the amount of their investment in the partnership. The members run and own the partnership, the amount of income that they will earn, and the extent of their powers, are contingent upon the percentage of their ownership, and are codified in the partnership agreement.
The limited liability partnership itself is not subject to any corporate income tax in the United Kingdom; instead, the profits are distributed to the members who pay personal income tax on their income from the partnership. The members are also liable to make national insurance contributions and are subject to capital gains taxation.
The management of a limited liability partnership will generally be conducted by the designated members, who can be viewed as being akin to directors. Two or more members must be designated members, who have a statutory responsibility for certain tasks including reporting obligations. The designated members may be to subject to fines in the event of their failure to undertake these duties. Unless the registrar is advised which members are designated members, all members of the limited liability partnership will be deemed to be designated members.
The main characteristics of a limited liability partnership in the United Kingdom are as follows:
there must be, at minimum, two members
at minimum, two of the members must be designated members
a registered office address in the United Kingdom is required
the names of the members of a limited liability partnership are available on the public record
accounting records must be maintained
annual accounts and returns must be submitted to the registrar
although itself not subject to taxation, a limited liability partnership must file an annual informational tax return
a limited liability partnership must be a commercial venture operating for profit
The advantages of a limited liability partnership The main advantages of a limited liability partnership are as follows:
all of the members enjoy limited liability
the liability of the members is limited to the amount of their investment in the partnership
unlike a company which may only trade within the objects stated in its memorandum of association, a limited liability partnership has unlimited capacity
a limited liability partnership provides for a more flexible management structure
a limited liability partnership is transparent for tax purposes and will be taxed in a similar way to a partnership, with members being taxed individually on their share of the limited liability partnership's income or gains.
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The limited liability partnership is a relatively new type of entity form available in the United Kingdom. Its introduction filled a gap in the range of entity types available in the United Kingdom by providing a structure which is as flexible as a partnership while offering limited liability to its members.
Although a distinct legal entity, a limited liability partnership is not subject to any corporate income tax, rather, partnership profits are distributed to its members, according to a pre-arranged formula codified in the partnership agreement, who pay personal income tax on their income from the partnership.
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The plethora of international laws and business structures makes choosing a jurisdiction and company structure an extremely complex decision. If you are unsure of the best course of action for your business, Coddan can advise you on the best location and type of entity, and can tailor a solution to your needs. If you wish to retain Coddan in a professional capacity, you can apply for an initial consultation appointment by following the link below. Book an initial consultation: use this form to request an initial consultation with one of our specialists |
Coddan offers three packages which are designed to meet the varying needs of our clients. Our Economy package is perfect for residents of the United Kingdom who wish to form a limited liability partnership with their own members, and registered office address.
Our Premier package has been designed for those clients who are non-residents of the United Kingdom, or who require a prestigious registered office address in a specific city within the United Kingdom.
If you do not have the requisite minimum members, or if you prefer to maintain a level of anonymity for legitimate business reasons, our Deluxe package is the perfect solution. In addition to a prestigious registered office address, with our Deluxe package, Coddan will act as a nominee designated member for your partnership allowing the beneficial member's name to be left off the public record.
Economy limited liability partnership package for just £125 The Economy limited liability partnership package is a fast and easy formation option. It is ideal for small to medium businesses who wish to appoint their own members, and who have their own registered office address within the United Kingdom. It includes:
The submission of your application and registration of your partnership within four to six working days
The payment of initiation, and the first year's registration fees
A laminated certificate of registration
A bound copy of the partnership agreement
A bound copy of the combined partnership register
The minutes of the first members' meeting
Membership certificates and completed members' register
All of the documents included in this package are sent directly to you via royal mail.
This option allows you to immediately appoint your own members. Upon registration, these appointees will be recorded as the original members of the partnership. A myriad of equity or debt financing options are available to partnerships that are registered in a person’s name where that person is responsible for the operations of the partnership.
Different types of entity require different combinations of officers; a limited liability partnership in the United Kingdom must have at least two members, and at least two of the members must be designated members. If you do not have the requisite officers, or if you wish to protect your privacy, you can use our nominee member services.
The Economy package can be upgraded with the addition of many complementary services, including: commercial and investment banking introductions, management services, administrative services, domain name registration, additional sets of partnership documents, nominee member services, book keeping and accounting services, notarisation and apostille services.
For more information: email info@ukincorp.co.uk, or use our Live Chat service, or call: Call FREE 0800 081 1510, Overseas Residents: +44 845 020 4269 or +44 207.935.5171, Fax: +44 207.504.3531
Premier limited liability partnership package for just £175 The Premier limited liability partnership package is a fast and easy formation option. It is ideal for non-residents of the United Kingdom, or for those requiring a prestigious registered office address in a specific city within the United Kingdom. It includes:
The submission of your application and registration of your partnership within four to six working days
The payment of initiation, and the first year's registration fees
A laminated certificate of registration
A bound copy of the partnership agreement
A bound copy of the combined partnership register
The minutes of the first members' meeting
Membership certificates and completed members' register
Our United Kingdom limited liability partnerships are established as general trading partnerships, and as such are able to conduct most kinds of business. Starting from just £125.00, we offer a range of packages designed to suit the varying requirements of our customers. Our United Kingdom limited liability partnership formations typically take between four and six days to effect, and include: a Certificate of Registration, the Partnership Operating Agreement, and the payment of all initiation fees. Upon formation of your United Kingdom limited liability partnership, we will send all of the partnership documents directly to you via royal mail.
THE FOLLOWING UPGRADES CAN BE ADDED TO THE ABOVE PACKAGE:
1. LLP Pliers Seal - £20.00. 2. Domain Name Registration for two years - £16.00. 3. Provision of a Registered Office Address for 12 months - £50.00. 4. Provision of a Nominee Designated Member for 12 months - £125.00. 5. Certificate of Good Standing - £35.00. 6. Notarisation & Apostille of Documents.
All of the documents included in this package are sent directly to you via royal mail.
This option allows you to immediately appoint your own members. Upon registration, these appointees will be recorded as the original members of the partnership. A myriad of equity or debt financing options are available to partnerships that are registered in a person’s name where that person is responsible for the operations of the partnership.
This package also includes the first year's fees for a local registered office address, which is a statutory requirement in the United Kingdom. The yearly renewal fee for this package is £50, which includes the cost of a registered office address.
Different types of entity require different combinations of officers; a limited liability partnership in the United Kingdom must have at least two members, and at least two of the members must be designated members. If you do not have the requisite officers, or if you wish to protect your privacy, you can use our nominee member services.
The Premier package can be upgraded with the addition of many complementary services, including: commercial and investment banking introductions, management services, administrative services, domain name registration, additional sets of partnership documents, nominee member services, book keeping and accounting services, notarisation and apostille services.
For more information: email info@ukincorp.co.uk, or use our Live Chat service, or call: Call FREE 0800 081 1510, Overseas Residents: +44 845 020 4269 or +44 207.935.5171, Fax: +44 207.504.3531
Deluxe limited liability partnership package for just £425 The Deluxe limited liability partnership package is a fast and easy formation option. It is ideal for small to medium businesses who require a registered office address, and a nominee designated member in order to maintain anonymity. It includes:
The submission of your application and registration of your partnership within four to six working days
The payment of initiation, and the first year's registration fees
A laminated certificate of registration
A bound copy of the partnership agreement
A bound copy of the combined partnership register
The minutes of the first members' meeting
Membership certificates and completed members' register
All of the documents included in this package are sent directly to you via royal mail.
By using the nominee designated member service which is included in this package, you can protect your privacy by not having your name listed on the public record as a member. You will retain full control and ownership of the membership by virtue of a special agreement between Coddan and yourself.
This package also includes the first year's fees for a local registered office address, which is a statutory requirement in the United Kingdom. The yearly renewal fee for this package is £300, which includes the cost of a registered office address, and of a nominee designated member.
Different types of entity require different combinations of officers; a limited liability partnership in the United Kingdom must have at least two members, and at least two of the members must be designated members. If you do not have the requisite officers, or if you wish to protect your privacy, you can use our nominee member services.
The Deluxe package can be upgraded with the addition of many complementary services, including: commercial and investment banking introductions, management services, administrative services, domain name registration, additional sets of partnership documents, nominee member services, book keeping and accounting services, notarisation and apostille services.
For more information: email info@ukincorp.co.uk, or use our Live Chat service, or call: Call FREE 0800 081 1510, Overseas Residents: +44 845 020 4269 or +44 207.935.5171, Fax: +44 207.504.3531
The difference between members and designated members Members When a limited liability partnership is formed, the members are the people named on the incorporation document; these are the owners and investors of the business. The mutual rights and duties of the members of a limited liability partnership are governed by the limited liability partnership agreement or by law.
Every member is the agent of the limited liability partnership and the partnership is bound by anything done by a member on its behalf, unless the member had no authority to act in that capacity on behalf of the limited liability partnership, or if the person with whom the member is dealing knows that the member had no authority to act or had no knowledge of his or her membership of the limited liability partnership.
Designated members Designated members have the same rights and duties towards the limited liability partnership as any other member; however, the law also places extra responsibilities on designated members. In particular, designated members are responsible for:
appointing an auditor
signing the accounts on behalf of the members
delivering the accounts to the registrar
notifying the registrar of any membership changes, changes to the registered office address, or changes of the name of the limited liability partnership
preparing, signing, and submitting an annual return
acting on behalf of the limited liability partnership if it is wound up and dissolved
Designated members are accountable in law for failing to carry out these legal responsibilities.
Our related and post-formation services
1. Members may be residents outside of the United Kingdom. 2. A minimum of only two members is required. 3. Members may reside anywhere in the world and may be bodies corporate registered in the UK or elsewhere. 4. The liability of the members of a limited liability partnership is limited to the amount of their contribution, which may be as little as £0. 5. Limited liability partnerships are not subject to corporate income tax. 6. The Limited Liability Partnership Act confers the same tax transparency as for partnerships: members are considered self employed for tax purposes. 7. As a separate legal entity, a limited liability partnership may own property, sue, and be sued. 8. The structure of a limited liability partnership is more suitable for a group of people engaging together in a property or finance venture where it may be necessary to account for partners coming and going more frequently than you would expect in a normal partnership business. 9. Unlike a company which may only trade within the objects stated in its Memorandum and Articles of Association, a limited liability partnership has unlimited capacity. 10. A limited liability partnership provides a more flexible management structure.
Partnerships require ongoing maintenance and must meet certain local reporting and statutory requirements. In addition to providing business entity formation in the United Kingdom, Coddan offers a host of services designed to support your business, and to help you meet the statutory requirements. This comprehensive range of services includes:
A nominee director service
A nominee secretary service
A nominee shareholder service
A nominee member service
Commercial and investment banking introductions
A registered office address service
A registered agent service
Management services
Registration of shipping vessels
Administrative services
Accounting and bookkeeping services
Notary and Apostille services
You can order most of these services at the same time as you order your limited liability partnership formation. If you require any other services or assistance, contact us at info@ukincorp.co.uk.
Ready-made limited liability partnerships Coddan holds a stock of ready-made limited liability partnerships in the United Kingdom starting from just £500. Ready-made partnerships are useful in a variety of situations; where, for example, you do not have time to wait for the formation of a partnership in the United Kingdom, or where you need an aged partnership in order to bid on contracts or to create the impression of business longevity. You can purchase a ready-made partnership and have its ownership transferred to you within hours.
Click here to see our list of ready-made companies, or here to learn more about ready-made companies in general.
Additional information What follows is additional information pertaining to limited liability partnerships in the United Kingdom, which is organised under the following headings:
An overview of limited liability partnerships The limited liability partnership is a separate legal entity with unlimited capacity which means that it can do anything that a natural person could do. It has the ability to enter into contracts and hold property, and will continue its existence in regardless of any change in membership. While in law a limited liability partnership is separate from its members, its members may be liable to contribute to its assets if it is wound up; the extent of that potential liability is as specified in the regulations under the Act (Section 1 (4)). The limited liability partnership's existence as a separate legal entity makes it more closely akin to a company than to a partnership (except insofar as the internal relations are governed by agreement between the members). The Act therefore draws on the principles embodied in the companies' legislation.
As a limited liability partnership is a body corporate, Partnership Law will not in general apply to a limited liability partnership. Elements of Partnership Law may, however, be applied to limited liability partnerships by regulations (Section 15 (c)); such regulations will apply in the absence of agreement as to any matter concerning the mutual obligations of limited liability partnership members, or limited liability partnership members and the limited liability partnership (Section 5 (l) (b)). Care is needed when a limited liability partnership is established that the members (who enjoy limited liability behind the limited liability partnership) do not establish relationships between themselves which would amount to a partnership (under the Partnership Act 1890) in effect running in parallel to the limited liability partnership. Clearly any such parallel partnership would not enjoy limited liability.
In any dealings with third parties, it should be made clear that the only contracting party is the limited liability partnership. The members should avoid in any documentation between themselves any suggestion that there are any mutual agency relations between members; a member's only agency relationship should be as an agent for the limited liability partnership. Some advisers consider that, to avoid problems in this area, the use of the term "partner" to describe members should be avoided, and that use of the words "the partnership" or "the firm" to describe the limited liability partnership should similarly be avoided.
The limited liability partnership's existence as a corporate entity means that the effect of the general law is different from its effect on a partnership. For example, a third party will usually contract with the limited liability partnership itself rather than with an individual member of the limited liability partnership, whereas, in general, a partner contracts as principal and on behalf of the other partners. Should a partner be negligent in work carried out for a client, there will generally be two possible causes of action against that partner: contract and tort. However, because the limited liability partnership will be a separate legal entity with which the client has contracted, only one action (the tort action) is potentially available against the member.
As regards the management of the internal affairs of the limited liability partnership, the position is similar to that applicable to partnerships. Members will not be obliged to enter into a formal agreement among themselves and, if an agreement is entered into, there will be no obligation to publish it. As in the case of partnerships, however, there will, in general, be clear advantages in having a formal written agreement between members to regulate the affairs of the undertaking and to avoid disputes between the members. The formal procedures needed to establish a limited liability partnership, including the need for an application to the Registrar, are likely to encourage the members to set up a formal arrangement before the limited liability partnership commences business.
The Regulations do, however, include default provisions governing the relationship between the members, which apply where no agreement exists, or where the agreement does not include provision to deal with a particular issue. The profits of the business of a limited liability partnership are taxed as if the business were carried on by partners in partnership, rather than by a body corporate. This is intended to ensure that the commercial choice between using a limited liability partnership or a partnership is a tax neutral one.
Limited liability partnerships will be subject to the same taxation regime as current partnerships and will still be able to regulate their internal constitution by a confidential partnership agreement. However, the limited liability partnership will constitute a separate legal person and third parties will contract with the limited liability partnership rather than with individual partners. Although partners will be liable for their own acts, they will not be liable for the acts of their fellow partners, for which the limited liability partnership as a whole shall be liable. We are not in a position to advise on all the US tax consequences of a UK limited liability partnership, but it is clear that the US views the limited liability partnership as a corporate vehicle for US tax purposes so giving the limited liability partnership entirely different UK tax and US tax treatments.
For example, a US group investing in the UK and having part of its group in the UK, may find the limited liability partnership is able to benefit from the favourable UK tax treatment touched on above whilst ensuring, for US purposes, that certain UK profits would not be taxed in the US until the limited liability partnership distributes those profits to the US entities in the group.
While the US and UK tax advantages of the limited liability partnership very much depend on the particular circumstances of the relevant corporate group, the limited liability partnership is unique amongst UK vehicles in having such a split UK and US tax treatment, and should be considered carefully for any group restructuring.
Insolvency In the event of the limited liability partnership becoming insolvent, members can be required to repay profits (with interest) and other property which has been withdrawn from the limited liability partnership within the preceding two years. Such repayment can only be sought if the member knew, or ought to have realised, that there was no real prospect of the limited liability partnership avoiding insolvent liquidation. This test encompasses a subjective and an objective test element and has regard to the member's actual knowledge and belief, and the knowledge and belief which would be expected of a similar person carrying on the same function of that member.
Personal fault If an individual member is purported to have been negligent, it may be possible to bring a civil negligence action against that individual. However, the courts have indicated that they would have regard to whether the allegedly negligent advice was given in a personal capacity or whether the limited liability partnership assumed responsibility for the advice.
Changes to the accounting and auditing requirements for limited liability partnerships in the United Kingdom Recent changes to the accounting and auditing requirements in the Companies Act 1985 have now been reflected in the above regulations, and will affect limited liability partnerships from financial years beginning on or after 1 January 2005. This is a brief summary of those changes.
All limited liability partnerships will have the option of preparing their individual accounts using International Accounting Standards (IAS) rather than UK GAAP, and will also have the option of preparing their consolidated accounts using IAS. Limited liability partnerships that continue to prepare their accounts using UK GAAP will have a new accounting option to use fair value accounting for financial instruments, investment property and/or living plants and animals.
For limited liability partnerships that continue to prepare their accounts using UK GAAP, there are changes to the requirements in the following areas: how items must be presented in the balance sheet and profit and loss account, and disclosure of information on derivatives.
For limited liability partnerships that have overseas interests, the current automatic three-month extension under section 244 of the Companies Act 1985 for laying and delivering accounts is repealed. For parent limited liability partnerships, there are changes to the requirements and options on consolidation. For limited liability partnerships that have their accounts audited, there are new requirements concerning the audit report.
A number of amendments have also been made in line with the package of reforms to corporate insolvency introduced by the Enterprise Act 2002. These are aimed at encouraging the rescue of viable businesses that get into financial difficulty.
Administration of a limited liability partnership UK limited liability comes at a price: the limited liability partnership's annual accounts are in the public domain. Limited liability partnerships have to provide financial information to Companies House and have to file audited annual accounts which are similar to those of a limited company. The name and profit share of the highest paid member must be included within the filed accounts. Similar to a conventional partnership arrangement, the agreement between members of a limited liability partnership remains private. This is in contrast to the Articles of Association of a limited company which must be filed at Companies House and are on the public record. The management of a limited liability partnership and the relationship between the partners is more flexible than that of a limited company: whereas a limited company incorporates the statutory management controls imposed by the Companies Acts and other legislation, a limited liability partnership can be managed in almost any way that the members wish.
Limited liability partnerships and their members are not covered by partnership law (implied by statute and common law) as its applicability is expressly excluded by the limited liability partnership Act 2000. This means that a limited liability partnership agreement will usually be longer than a similar conventional partnership agreement because it must cover matters which may otherwise be incorporated into the agreement by statute or common law. It is possible for a limited liability partnership to exist without any written agreement as the limited liability partnership Act 2000 will impart very rudimentary provisions into the arrangement. However, these minimum provisions will be unsatisfactory for most businesses.
Stamp duty relief on conversion A partnership which converts to a limited liability partnership will be eligible for stamp duty relief on property which is transferred within the first twelve months of incorporation provided that all of the partners in the existing partnership convert to the limited liability partnership, and that the interest of the original partners in the partnership property is the same under the limited liability partnership as under the pre-limited liability partnership partnership.
Relevance to private equity structures In a typical limited liability partnership fund structure, a company will be the general partner of the limited liability partnership fund, which will contract to receive management supplies from a management company. For the reasons set out below, private equity and venture capital houses, (especially smaller, independent houses), should consider whether it might be more tax efficient to use a limited liability partnership instead of a company to carry out the management function, by transferring the management role of existing or new funds from the management company to a new limited liability partnership. Executives would be members of the limited liability partnership, instead of being employed by the management company. As the liability of members of a limited liability partnership is limited, any additional liability risks for executives will generally be manageable.
Tax transparency The fees earned by the management limited liability partnership will accrue directly to its members, in the same way as they would in an ordinary partnership. That compares to a management company, which pays tax on its profits. However, a limited liability partnership cannot be in a group with other companies for the purposes of loss relief and capital gains tax so that, for example, excess management expenses of a corporate general partner cannot be surrendered to it.
National insurance The national insurance position of members of a limited liability partnership is the same as that of partners in an ordinary partnership. The members themselves will pay class two and four national insurance contributions which will amount to approximately £2,200 a year, together with the 1% surcharge on profits introduced in 2003. As the members of a limited liability partnership are, strictly speaking, self-employed, there will be no obligation on the limited liability partnership to pay employer's national insurance contributions on such amounts, only on the amounts of the payments to employees of the limited liability partnership. A company would have to pay national insurance contributions at the rate of 12.8% on the value of the employees' salary/benefits.
Restricted securities regime Schedule 22 of the Finance Act 2003 (now incorporated in Part 7 of ITEPA), introduced sweeping changes to the tax treatment of securities and interests in securities acquired by reason of employment. Where any such securities or interests in securities are acquired on or after 16 April 2003, and where any condition or restriction applies which would or could reduce the market value of those securities, they will fall within the new regime. When the restrictions fall away, or when the securities are sold, an income tax charge will arise based on market value, with a proportionate deduction depending on what the employee paid (if anything) to acquire the securities. There could also be PAYE and national insurance liabilities.
This regime raises problems both for the management company structure and for a structure using a limited liability partnership. Normally, the executives would be employees of the management company. If they are also awarded shares in the company, such shares would almost certainly be employment related securities and may fall within the restricted securities regime. However it will not be in every case that shares will be awarded to the executives, and it may now be sensible, taking other commercial considerations into account, not to award shares. The new regime also creates two potential problems for members of a limited liability partnership. First, the term "securities" is extremely widely defined and includes units in a collective investment scheme, which term is also given a broad definition.
It is potentially wide enough to cover any partnership but it has been indicated that it would not cover one that is trading. Although the limited liability partnership may be carrying on a trading activity (for example, as manager of a fund), if it has a significant investment, (and this could include its shareholding in the general partner company), this could bring it within the collective investment scheme definition and therefore interests in it would be "securities" for the purposes of the legislation.
Secondly, "employment" is also widely defined, including both former and prospective employments. Therefore if a group of existing employees operating through a management company re-forms and creates a limited liability partnership, they will probably acquire an employment related security (their interest in the limited liability partnership) by virtue of a former employment. Similarly, if a new joiner becomes a member of a limited liability partnership and at the same time it is expected that he will join the board of an investee company, he may acquire his limited liability partnership interest in connection with that prospective "employment" (a non-executive directorship counts as "employment" for these purposes).
It is possible to make an election to be exempt from the restricted securities regime. If there is the slightest possibility that the limited liability partnership itself could be a collective investment scheme as described above, and if the former or prospective employment condition could apply, the founder members of the limited liability partnership should make such an election, before the limited liability partnership acquires an interest in the general partner company. Making such an election could give rise to an income tax liability on joining the limited liability partnership but that liability will not be significant if the limited liability partnership has no real value at that time.
Carried interest Where executives are employed by, or are directors of, a management company, there will always be an "employment" and it will be more difficult to ensure that carried interest is not within the restricted securities regime, especially for those who join after the fund has been raised. The entitlement of a limited liability partnership member to receive carried interest would not normally be an employment related security. However, if the members' interest in the limited liability partnership itself is an employment related security as described above, and carried interest holders (members of the limited liability partnership) obtain carried interest through their limited liability partnership membership, the carried interest is also deemed to be obtained from employment.
Also, if any individual members of the limited liability partnership hold an office or employment with any company or other person connected with the limited liability partnership, for example, a general partner company or an investee company controlled by the fund, the opportunity for those limited liability partnership members to receive carried interest can be deemed to arise from that office or employment, and the result would be to bring the carried interest within the restricted securities regime. We do not believe that the new rules were intended to have this effect and discussions are taking place with the Inland Revenue to seek clarification.
It should be emphasised that an interest in a limited liability partnership will not in every case be regarded as an employment related security, and with careful structuring, this possibility can be avoided. Specific consideration should always be given to whether an election to be exempted from the regime should be made, in which case the possibility of adverse tax consequences is minimised, and the benefits of the limited liability partnership structure can apply without subjecting members to tax on deemed employment income.
Personal service company rules The Inland Revenue impose income tax and national insurance charges in situations where an individual provides services through an intermediary company in circumstances where, in the absence of an intermediary, the individual would be an employee of the ultimate recipient of the services. The legislation itself seeks to apply the tax charges where "an individual personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person." As the limited liability partnership, which will be separately regulated, is not providing the services of any particular individual performing the services, the Inland Revenue may accept that there will be no income tax or national insurance liabilities, because there is no intermediate entity to which the legislation could apply. However, careful structuring is required to ensure that the arrangement is not vulnerable to attack on these grounds.
Flexibility for changes of partnership interest Using a limited liability partnership could give greater flexibility when changing the interests held by the members of the management entity. Where the entity is structured as a company, any award of shares or share options to a new executive joining as an employee could give rise to an income tax liability. If the management entity is a limited liability partnership, new joiners could immediately be given equity with no tax consequences, provided that the arrangement is structured in such a way that there is no possibility of the restricted securities regime applying.
A sale of shares in a management company could potentially give rise to a tax charge on capital gains, although business asset taper relief would apply to any disposal, with the maximum rate of taper (an effective tax rate of 10% for a higher rate taxpayer) applying after only two years' ownership. Sales of shares in a management company can be made tax-free by a trust established by non-residents or non-domiciliaries.
Sale of a management business where a limited liability partnership is used as a management vehicle Business asset taper would of course also apply to a disposal of a partnership share in a trading limited liability partnership. However, on a disposal of the entire management business, there may not be any significant assets as the main asset would be the contract to manage the limited liability partnership. Gains made on the sale of a limited liability partnership interest by trusts set up by non-domiciliaries or non-residents as mentioned above will remain liable to capital gains tax because the trustees will be treated as carrying on a trade in the UK, but incorporation of the limited liability partnership prior to disposal of the business may improve the position.
Stamp duty The transfer of an interest in a limited liability partnership is liable to stamp duty at the relevant rate, that is, at 1%, 3% or 4%, depending on how much is paid for the transfer. Such interests are treated for stamp duty purposes as if they were interests in a general partnership, rather than as shares which would attract stamp duty of 0.5%.
Interest relief Where new partners take out a loan to join the limited liability partnership which has a trade, interest relief will be available.
Liquidation When a limited liability partnership ceases to trade, the tax transparency also ceases so that the limited liability partnership will be subject to corporation tax on its chargeable gains when amounts are realized on final dissolution. Management limited liability partnerships set up to manage a particular fund which are not intended to be used for other future funds may therefore fall foul of this rule; however, it is difficult to see exactly what assets the limited liability partnership would have at that stage, as it is a service entity, rather than providing goods and therefore having stock in trade assets. Even then, the Inland Revenue have said that they will not take the point unless the limited liability partnership is being wound up for tax avoidance reasons, or the period of winding up is protracted.
Pensions Members of a limited liability partnership will have to make their own personal pension arrangements out of their proportionate share in the limited liability partnership's profits. The maximum contribution which can be made is 17.5% of net relevant earnings up to £99,000. Older members (36 plus) will be in a slightly better position, as they can contribute between 20% and 40%, depending on age.
VAT Since a limited liability partnership is a body corporate, the limited liability partnership itself is the legal entity for VAT purposes. It can therefore be registered for VAT and, most importantly, in the typical limited liability partnership scenario, it can be VAT registered as a group with the general partner, provided that the control test is met, that is, either the limited liability partnership will have to have the general partner as its subsidiary, or the general partner would have to be a controlling partner in the limited liability partnership (it seems that the former scenario is much neater).
There are both advantages and disadvantages to adopting a limited liability partnership structure, and anyone considering whether to go down this route would need to analyse all the relevant factors by reference to their own individual circumstances. The decision will be a finely-balanced one and will depend on a range of factors, including the extent to which the executives involved in management are to share in incentive arrangements. In many cases it will be advantageous to use a limited liability partnership as the management vehicle, because there will only be a risk that the restricted securities regime will apply if the structure falls into one of the specific traps, and it will generally be harder to avoid these traps using a management company structure.
Background to the limited liability partnership act The Limited Liability Partnerships Act 2000 came into force on 6 April 2001 (by virtue of Statutory Instrument no. 3316 of 2000). The main purpose of this new Act is to create a new form of legal entity, the limited liability partnership. A limited liability partnership combines the organisational flexibility and tax status of a partnership with limited liability for its members. This limited liability is made possible by the fact that a limited liability partnership is a legal person distinct from its constituent members.
The act empowers the government to apply the provisions of company law and insolvency law, with appropriate modifications, to limited liability partnerships. These powers have been used, through the issue of the Limited Liability Partnerships Regulations 2001, as the basis for much of the constitutional structure of limited liability partnerships and has enabled safeguards to be put in place for those dealing with limited liability partnerships. The safeguards include provision for the public disclosure of information about limited liability partnerships, particularly their finance, and provisions dealing with the situation if a limited liability partnership should become insolvent.
In general, the act has effect only in England, Wales and Scotland. In Great Britain businesses are structured mainly as limited companies, partnerships or sole traders. Each of these is subject to different regulatory and tax regimes reflecting their organisation and ownership. The only option for many professional practices, in the past, has been to operate as partnerships, since either the general law or the rules of their professional body denied them the ability to incorporate. Accountancy firms have, for instance, only been permitted to incorporate since 1989. As such, professional practices were required to operate as partnerships, they were subject to the legal rules relating to the liability of partners.
The Partnership Act 1890 sets out special rules relating to the liability of partners to persons dealing with them: all partners are liable jointly, and in Scotland severally also, with their other partners for all the debts and obligations of the partnership incurred during their membership. All partners are jointly and severally liable for any loss or damage arising from the wrongful acts or omissions of any of their partners (as well as their own) arising in the ordinary course of the partnership's business or with the authority of the partners. When the members are liable jointly and severally for any loss or damage, this has the effect that an injured person may opt to sue one or more of the members separately or all of them together.
These arrangements were generally appropriate when all partnerships were small and the partners were of the same profession working closely with one another. However, unlimited liability for partners has become an increasing cause for concern in the light of a general increase in the incidence of litigation for professional negligence and in the size of claims, the growth in the size of partnerships (since in a very large partnership not all the partners will be personally known to one another), the increase in specialisation among partners and the coming together of different professions within a partnership, and the risk to a partner's personal assets when a claim exceeds the sum of the assets and insurance cover of the partnership. Although these concerns arise most acutely in very large professional partnerships they are relevant to partnerships generally.
The limited liability partnership goes some way towards addressing these concerns since its members benefit from limited liability, the limited liability partnership being a separate legal person. In general the limited liability partnership and not its members will be liable to third parties. Proposals that it should be possible in Great Britain to organise a business as a limited liability partnership emerged out of a review of the law of joint and several liability. In 1996 the DTI published a feasibility investigation of joint and several liability carried out by the Law Commission. The investigation focused mainly on the joint and several liabilities of professional defendants, seeking to ascertain whether there was an arguable case for replacing joint and several liabilities by, for example, a system whereby each defendant might be liable for only a proportionate share of the loss.
The DTI took the opportunity to consult on the distinct but related question or whether or not to amend the law in Great Britain to allow limited liability partnerships. This question was asked in the knowledge that the concept of limited liability partnerships was well known in some overseas jurisdictions, particularly the US. Jersey too was working on implementing its own limited liability partnership legislation in response to representations from the accountancy profession, with a view to attracting offshore registrations.
In February 1997 the DTI published a consultation paper 'Limited Liability Partnerships: A New Form of Business Association for Professions' (URN 97/597). The response to the paper confirmed that there was a demand for the new vehicle across a wide range of professions, and agreement in principle from submissions from those who were potential clients, and providers of capital to limited liability partnerships. The paper was followed by the publication of a draft Bill and regulations (URN 98/874) in September 1998. Revised draft regulations were published again for consultation, together with the draft Bill (URN 99/1025) in July 1999. In February 2000, a further consultation document was published concerning regulatory default provisions governing the relationship between members (URN 00/617), and revised regulatory default provisions were published in May 2000 (URN 00/865). The outcome of the various consultations was the enactment of the act by Parliament in July 2000 and the issue of the Regulations in March 2001.
It should be noted that in the UK, a limited liability partnership will normally be taxed as though transparent for taxation purposes so that the profits, losses, and gains will be directly attributable to the partners themselves. Whilst the most emotive differences may relate to the public disclosure requirements, the other differences between a UK limited liability partnership and a US limited liability company may have a significant financial impact for a new business and the partners when setting up in the United Kingdom. There is also uncertainty as to how a UK limited liability partnership will be taxed in a foreign jurisdiction as the UK limited liability partnership has a distinct separate corporate legal personality in the UK. It is therefore possible that some foreign jurisdictions may seek to tax income or profits arising in their country as though the limited liability partnership were a body corporate. Great care will, therefore, need to be taken if it is desired to operate in the UK through a limited liability partnership business vehicle, and consideration should be given to using the limited liability partnership vehicles available in alternative jurisdictions.
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