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Overview and Case Studies of the UK Limited Liability Partnership
This article’s goal is to outline the advantages of using a Limited Liability Partnership ("LLP") as a UK platform for worldwide business and investment.
Although the private limited liability company is the most popular corporate entity form allowed under UK corporate law, the LLPs are widely utilized in overseas tax structures for their several advantages.
This type of business entity gives its members limited liability responsibility and therefore incorporates aspects of limited companies while yet maintaining the organizational flexibility and tax position of a partnership.
Contents
Overview & Operational Matters
Fiscal efficiencies
Case Study: UK LLP as an Investment Platform
Case Study: UK LLP as a Trading Vehicle
Final remarks
1. Overview & Operational Matters
An LLP is an entity with its own legal capacity. It has the ability to enter into contracts in its own name, own assets in its own right, and is responsible for its own debts and commitments. An LLP and a limited company are extremely comparable and analogous entities in the eyes of the law.
It is a distinct legal business entity that offers the advantages of limited liability while giving its members the freedom to set up their internal organization like a conventional partnership.
We shall go into more detail about the administrative aspects pertaining to the creation and management of a UK LLP below.
(A) Establishment of a UK LLP
A LLP is formed by submitting the necessary form to Companies House (which principally contains the name and registered office of the LLP and the name, and personal details of each of the initial members and must be signed by each of the initial members).
The process of incorporation is typically quick, Companies House issues a certificate of incorporation, just like they would for a brand-new private limited company, giving the LLP its own registration number.
Unlike limited liability companies, LLPs do not have Articles of Association to be filed publicly with the Companies House. Members instead enter into a Partnership Agreement (which sets out the rights and obligations of the members of the LLP). It is worth mentioning that the Partnership Agreement is a purely private document and does not need to be filed with a public registry. There is therefore an additional layer of confidentiality compared to the Articles of Association of companies.
LLPs have no restrictions on the activities they can engage in, or the assets they can own, and there are no minimum capital requirements.
(B) Membership
An LLP is formed by members who are either Designated Members (“DM”) or Ordinary Members (“OM”). An LLP must have at least two DM (individuals or legal entities, dormant legal entities can also act as DM). However, there is no maximum number of either DM or OM by law.
A DM, in addition to an OM, has certain responsibilities similar to those of a Company Secretary (i.e. appointment of auditors, signing the FS, submission of FS before Companies House, delivery of notices to the Companies House, etc.). In addition, the Partnership Agreement may grant DMs additional powers similar to those of a Company Director of a limited company.
OMs are expected to demonstrate a duty of care (i.e. carry out the LLP's instructions, act in good faith, and not allow conflicts of interest) only with respect to transactions entered into on behalf of the LLP.
(C) Partnership Agreement
A Partnership Agreement is a non-public document that does not require registration with Companies House and provides a member with all relevant details regarding the relationship between members and how the LLP will be managed.
An LLP can offer more flexibility than a limited liability company regarding profit allocation and distribution as the facto Partnership Agreements can provide for different profit sharing and income profit distribution between members. The corporate governance structure is thus flexible and adaptable and further easily modifiable.
(D) Continuous obligations
UK LLPs have ongoing management, financial and compliance obligations, including, without limitation, (i) registering the LLP and all of the members for Self-Assessment before HMRC (ii) filing annual FS, tax return, and confirmation statements (iii) reporting any changes to Companies House where necessary (iv) making sure the LLP is adhering to all sorts of statutory compliance.
2. Fiscal efficiencies
For UK tax purposes, the LLP is treated as transparent which means that broadly speaking if the members of the LLP are a non-resident and if the income of the LLP is a non-UK source, also the LLP and its members will not be subject to UK taxation.
Typically, members who are non-UK tax residents are only liable to UK tax on UK-source income, thus a UK LLP with non-UK tax resident members, trading and operating outside the UK is not subject to UK taxation on its members. Still, each non-UK resident member will have to report duties in the UK and may have similar duties in their country of tax residence.
3. Case Study: UK LLP as an Investment Platform
A UK LLP is an ideal vehicle to carry investment in a non-UK market when the members are non-UK tax residents. This is because the profits of a LLP are taxed as a partnership, then as long as there is no trading in the UK or source of income in the UK or member resident in the UK, the LLP can be structured to reach operational and also tax efficiencies.
The structure chart below shows an example of how a UK LLP can be structured with the purpose of managing investments located in non-UK assets or investment funds, with foreign investors.
The purpose of the structure is to invest in a Non-UK Target Investee Company / Fund through vehicle* in a reputable jurisdiction with tax transparency status while maintaining the full management and strategic direction of the venture.
In these cases, Investment Managers usually also act as DMs as they maintain full decision-making powers through efficient corporate governance provided within the Partnership Agreement.
It is worth noting that OMs are non-UK investors whose funds are managed by the LLP. (* Please note that potential regulations and licenses under the FCA must be reviewed on a case-by-case basis.).
Among the advantages we can list the following:
Members of the LLP are non-UK residents and the investment returns are non-UK sources, resulting in the LLP and its members not being subject to UK taxation.
Investment Managers retain full decision-making powers through the execution of a customized Partnership Agreement fit for the investment purpose.
A positive perception of the UK as an investment platform jurisdiction is an effective factor in raising capital worldwide.
4. Case Study: UK LLP as a Trading Business Vehicle
A UK LLP is also ideal to carry trading in non-UK markets when the members are non-UK tax residents. Likewise in the previous case study, the profits of a LLP are taxed as a partnership, then as long as there is no trading in the UK or source of income in the UK or member resident in the UK, the LLP can be structured to reach operational and also tax efficiencies.
The structure chart below shows how a UK LLP may be designed for the purpose of trading in non-UK markets when the members are non-UK residents.
The structure chart below shows how a UK LLP may be designed for the purpose of trading in non-UK markets when the members are non-UK residents.
The purpose of the structure is for non-UK resident natural persons to provide services to the Non-UK Market. The LLP enabled members to make use of a reputable jurisdiction to conduct business while maintaining tax transparency.
As the services are provided to the Non-UK Market, income has not originated in the UK. Under the individuals’ local jurisdiction, the UK LLP’s profits allocated to the members may not be taxed locally until not repatriated*.
Therefore, members may not be subject to UK income tax and defer income tax in their own jurisdictions until they decided to repatriate the profits. (*Tax relief to be checked in each case separately.).
Among the advantages we can list the following:
The UK LLP is cost-effective and easy to manage, so the day-to-day administration, when properly designed, is not time-consuming.
The UK jurisdiction is highly reputable and often the LLP will not have issues contracting with overseas commercial customers and providers.
Members of the UK LLP do benefit from a combination of the UK LLP’s tax transparency status and the tax rules of the members' local jurisdictions’.
5. Final Remarks
The LLP has the advantage of a vehicle that is comparable to a private limited company in terms of limited liability and legal personality combined with the advantage of partnerships that benefit being able to achieve a high level of efficiency in terms of organization flexibility and also taxation.
If flexibility in internal structure is needed, a LLP is excellent because the structure can be changed at any time by adding or removing members.
The UK and particularly London is one of the most important financial centers in the world. Therefore, it is a place with prestige and a good image, which allows us to structure vehicles in an efficient way.
**Disclaimer of No Legal Advice Intended**
The contents of this article are intended to convey general information only and not to provide legal or tax advice or opinions. The contents of this article, and the posting and viewing of the information in this memo, should not be construed as, and should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. No action should be taken in reliance on the information contained in this article. An attorney should be contacted for advice on specific legal issues.
Pasquale Barbuzzi
International Structuring | Finance & Tax | Advisory