Mark Kirkbride & Co Limited
Current Articles Of Interest
Limited Liability Partnerships
A Limited Liability Partnership 'LLP' is a new form of corporate vehicle with limited liability for its members, that is taxed as if it were a partnership.
Farming enterprise has, historically, mainly been conducted by means of an unincorporated entity (a sole trader or a partnership). From time to time farming companies have become popular, often for tax reasons rather then the attraction of limited liability.
So, will the introduction from 6 April 2001 of the LLP change the way farming is likely to be conducted in future to any significant degree ? My view would be that this is unlikely for the simple reason that an LLP will be more complicated and costly to establish than a company and there is little clear evidence concerning the practical benefit of limited liability to the majority of farmers. If the main reason for incorporating is to reduce the income tax burden then an LLP will not achieve this as it is taxed as a partnership.
So why have LLPs been created and who is likely to benefit from them ? The concept has been borrowed from the US and in particular the Delaware Limited Liability Partnership statute when, in 1993, the large accountancy practices registered their businesses under this statute. They were of course driven by the increasing size of professional indemnity claims and the inherent risk that a mistake by a partner somewhere in the organisation could put all of the partners' personal assets at risk, some of whom would not have ever met the errant partner ! For a variety of reasons simply using a corporation to conduct the business was not a practical answer
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The UK accountancy profession wished to follow the US example and when the largest firms in the UK threatened to transfer their businesses to Jersey the Government acted and promised to address the problem.
LLPs should not be confused with Limited Partnerships which have been around for many years. A Limited Partnership needs to be registered under the 1907 Limited Partnership Act and will confer limited liability upon certain partners who desire it provided they take no active part in the management of the business - for instance trustees of a family settlement may desire limited liability status. It is always necessary for there to be at least one general partner with unlimited liability (although the general partner may be a limited company).
Some key points of the UK LLP law are that :
- an LLP is a new form of corporate vehicle but taxed as if it were a partnership,
- incorporation of existing partnerships as LLPs should be tax neutral,
- an LLP loses its tax transparency if it ceases to carry on a business with a view to profit,
- the partners' personal assets should not be at risk,
- certain company law requirements must be complied with,
- it will be usual to have a member's agreement governing the conduct of the LLP,
- accounts will need to be filed with Companies House.
Are LLPs likely to be of much interest to the farming industry ? Time will tell but the author's current view is that the following points will be significant in answering this question.
- Limited liability may be of little practical benefit to many farmers whose main asset will be the farm which is likely to be the main source of security for bank borrowings.
- A farming business by its nature is less exposed to the huge potential claims experienced by the professions.
- Some of the tax advantages of incorporation, such as sheltering excess profits from higher rate income tax or an uplift in the base cost of capital assets upon certain incorporations, will not apply to LLPs as they are taxed as partnerships.
- An LLP is likely to be more costly to set up than a limited company.
- If certain partners desire limited liability (often trustees of family settlements with no desire to have an active role in the management of the business) then a Limited Partnership under the 1907 act may be a more acceptable solution.
Mark Kirkbride
The opinions expressed in this article are those of the author alone.
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