Converting to a limited liability partnership (“LLP”) can provide significant commercial benefit. It promotes senior managers' sense of ownership of and commitment to the business, and allows flexible management and remuneration structures to be put in place. In addition the tax burden of the business can be reduced, allowing for greater reinvestment. Together these can make a significant and ongoing difference to the growth of the business. 

The LLP structure is usually self-financing within a short period and, in most cases, savings in employer’s National Insurance Contributions (resulting from the members becoming self-employed for tax purposes) will cover legal costs in the first year of conversion.

LLP Advantage is a packaged conversion product from Mishcon de Reya allowing fast, tax efficient conversion to LLP with minimum business disruption. The standard package is offered for a fixed legal fee dependant on the size and nature of your business, and provides a rapid return on investment. 

What LLP Advantage can do for you:

There are three elements to conversion:

• Incorporate a new LLP
• Move the existing business from the limited company to the new LLP
• Retain the existing limited company to (a) hold accrued value for existing shareholders and (b) act as a “money box” – profits retained for investment by the LLP are therefore taxed at corporation tax rates (26% dropping to 23% over three years)

We will discuss individual requirements and provide fixed fee estimates for any of the optional add-ons or for complex, bespoke conversion arrangements.

The LLP Advantage standard package: 

• Incorporate the LLP and transfer the existing company’s name
• Provide and advise on:
  • the LLP Advantage agreement
  • documentation required for the transfer of assets (non-property) and contracts (excluding contracts relating to banking matters)
• Transfer registered intellectual property and one existing lease or freehold property to the LLP
• Update the articles of association of your limited company
• Advise on transfer of staff to the LLP, preparing necessary documentation including letters setting out terms to individual members
• Work with accountants to update systems and tax status and to maximise tax efficiency of the conversion and ensure that any tax liabilities on conversion are minimised.

Optional add-ons

• Bespoke remuneration structures
• Bespoke management control structures
• Bespoke ownership structure
• Multiple property transfers
• Extensive IP transfer
• Banking contract transfers
• Advising or liaising with third party advisors in relation to any regulatory approval or registration required
• Assignment of second and additional leases

FAQs

What is an LLP?

An LLP is an alternative corporate structure that gives the benefits of limited liability while allowing its members the flexibility of organising their internal structure as a traditional partnership and maintaining the tax treatment received by partnerships.

The structure provides other key benefits such as sense of ownership in the business and flexibility in management and remuneration structures. The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its own losses, the liability of the members will usually be limited. 

Who can become an LLP?

Any new or existing business can trade as an LLP (though it is not available to charities).

What are the benefits?

• Generation of loyalty, increased motivation and retention
• Improved staff equity participation in a simple and efficient manner
• A sense of ownership, encouraging staff participation and contribution to the business
• Flexible management and remuneration structures
• Legal advantages: chiefly limitation of liability, but also confidentiality of the LLP's constitution
• Increased profits and growth
• Efficient tax status: No employer’s National Insurance (13.8%) payable on members profit shares; no double taxation of distributed profits; members’ interests can be reallocated tax efficiently; and there is the flexibility of profit share to inactive members

Are there any challenges of the structure?

While the benefits are clear, it is worth noting that the structure is complex and requires careful management. Key challenges of the structure include:

• Corporate governance
• Management issues, including dealing with quasi-employment status of members
• Management of junior members participation rights
• Exit strategies

Our Employment and Corporate department have significant experience in these areas and will work with you at every stage to protect your business and give you the competitive edge.

Do LLPs pay corporation tax?

No, provided that the LLP carries on a trade or profession with a view to a profit. Instead, members are assessed to tax on their share of the LLP's profits or gains.

What are the LLP's record-keeping and disclosure requirements?

Like a company, the LLP must keep various records and registers and make them accessible to members, including preparing accounts and accounting records. If the audit thresholds are met, the accounts must also be audited.

LLPs are also required to make filings with the Registrar of Companies. LLPs must file the accounts and an annual return, as well as notifying any changes to the LLP's membership. However, the constitutional document of the LLP, the LLP agreement between members, need not be filed, which is an advantage over a company.

There are also requirements to include various details of the LLP such as its full name, number and registered office on business stationery and websites. 

How much does it cost to become an LLP?

Mishcon de Reya has created LLP Advantage, a packaged conversion product which allows fast, tax efficient conversion to LLP status with minimum business disruption. The standard package covering all legal aspects of conversion is offered for a fixed fee. Conversion provides a rapid, tangible return on investment.

What does the LLP Advantage package include?

LLP Advantage will:

• Incorporate the LLP and transfer existing company’s name
• Provide and advise on:
  • the LLP Advantage agreement
  • documentation required for the transfer of assets (non-property) and contracts (excluding contracts relating to banking matters)
• Transfer registered intellectual property and one existing lease or freehold property to the LLP
• Update the articles of association of your limited company
• Advise on transfer of staff to the LLP, preparing necessary documentation including letters setting out terms to individual members
• Liaise with your accountants to update systems and tax status

How long will it take?

Each conversion is different, 4-6 weeks is a realistic guide.

Will it cause significant disruption?

No – we will guide you through the process to ensure that its impact is minimised. The process will include holding a consultation with staff, informing suppliers and clients and taking steps to comply with the relevant disclosure legislation, as explained above. In some industries, regulatory authorisation may be required, and we can either advise on these matters or liaise with third party advisors. We will manage all of the above.

My organisation is converting to LLP status – I have been asked to become a member.

What is my liability?

The liability of members is generally limited to the capital they have contributed. Upon insolvency there are circumstances in which members can be asked to repay a maximum of two years' money that has been taken from the business.

What's in it for me?

Becoming a member gives you ownership interests in the business including a proportion of the profit share upon exit. You can be remunerated in a more flexible way and will move to a self employed tax status.

Do I have to pay a large amount of money upfront?

No – all members have to make a contribution in order to become a member - but this can be as low as £1,000, and could be funded by a loan from the business.

Am I still an employee?

Not normally – but this is subject to the specific set of circumstances and drafting of the LLP agreement. The test of whether a member will be genuinely self-employed is not determined by a consideration of titles. Instead, an Employment Tribunal will look at considerations such as whether the member genuinely shares in the risk and reward of self-employment, whether they invested their money in the business, whether they share in the proceeds if the business is sold, and whether they lose any money invested, should the business fail. It would also take into consideration whether the member works autonomously, shares profits on a year-on-year basis, whether the member can bind the LLP in third-party agreements, and whether the member pays their own tax.

Examining these points will provide the clues to whether the member is still an employee, and therefore has unfair dismissal rights, along with the right to things like statutory redundancy payments, statutory maternity and paternity pay, statutory sick pay and parental leave. Regardless of whether members are genuinely self-employed, they will continue to be protected by all of the discrimination laws

What are the duties of a designated member?

In an LLP structure, at least 2 members must be "designated members". Essentially like compliance officers, designated members are responsible for carrying out certain duties including some of those that would normally be carried out by a company director or secretary. They include such things as signing the annual accounts, filing the annual accounts and annual returns with Companies House and, in the event of insolvency proceedings, providing any statement setting out the affairs of the business i.e. assets, debts and liabilities.