Is Limited Best?

Manufacturers are starting to wake up to the operational and taxation advantages of Limited Liability Partnerships.

With the current economic environment placing increasing pressure on business cashflows, government asking businesses to contribute more to the treasury pot by increasing taxes and inflationary pressures knocking on the door to reduce margins, forward thinking manufacturing businesses are exploring ways to ease these pressures.

One important and often extremely successful way has been to ask whether its business structure is right in the current climate. As a result, there has been a strong surge towards businesses restructuring from limited companies to potentially lower taxed limited liability partnerships ("LLP’s") and this inevitable flow is just starting to catch on amongst manufacturing entrepreneurs.

An LLP is a hybrid of a limited company and a partnership, and for tax purposes is treated as if it were a partnership. The LLP consists of members who are entitled to a share of the LLP’s profits.

The main advantages of LLP conversion from a Limited company can be outlined as follows: -

Immediate material Tax/NI savings
Significant cashflow advantages
Less cumbersome than a company to introduce key employee incentive arrangements;
Significant long term tax advantages on disposal of any business compared to a Company.

Taking each of the advantages in turn, it is worthwhile exploring each one:

(i) Tax and NI Savings

A structure combining an LLP owned by its members directly and by a limited company, which in turn is also owned by the aforementioned members, will often be an optimal one (in terms of tax) for any company with profits in excess of £300,000 (before owners salaries).

Converting from a simple Limited company to the LLP/Limited Company combination can in fact reduce marginal taxes by up to 45%!

(ii) Cashflow Savings

By becoming a member of an LLP rather than a director/employee of a company an entrepreneur can be taxed as a self employed individual. Thus Income Tax becomes payable twice a year (January and July) on earnings (up to 22 months in arrears), rather than monthly which is the case with salaries under a PAYE scheme.

Hence the conversion to LLP can generate a significant amount of extra cash for businesses simply by holding onto the PAYE saved as a tax provision for its members’ personal tax liabilities.

An equally pleasant consequence of being a member of an LLP rather than an employee is that an individuals’ company car Benefit in Kind tax charge falls away!

(iii) Staff Incentives

Any entrepreneur wanting to incentivise key employees by offering them a stake in the company via shares or share options would require the employees to either pay for the shares or for the company to pay the tax on the benefit in kind (i.e. the value of the shares) received by the employees.

Becoming a member of an LLP need not have to involve any tax charge.

In addition, any key employee converting to a member of the LLP would also save the LLP/Company up to 12.8% Employers and National Insurance.

(iv) Sale/Disposal of the business

The sale price of any business will invariably involve considering the tax position of both vendor and purchaser. By converting to an LLP potentially reduces the number of layers and amount of taxes on a sale. Thus it often involves the vendor receiving more net funds from the sale.

Whilst an LLP conversion will not be the answer for all manufacturing entrepreneurs, for the majority of businesses, it is something that should at least be considered as the potential tax and cashflow savings are significant.

To find out more about LLP structures and how it may be suitable for your business, contact Maureen Penfold at mpenfold@kingstonsmith.co.uk or 020 8848 5500.