The UK Limited Liability Partnership – Overview and Case Studies
The purpose of this article is to explain the benefits and advantages of adopting a UK Limited Liability Partnership (“LLP”) as a vehicle for international investment and trading. The UK corporate regime provides for several types of business entities, with the private limited liability company being the most commonly used vehicle; however LLPs are also used in international tax structures. This form of business entity offers limited liability to its partners and embraces features similar to a limited company, whilst at the same time, it retains the organisational flexibility and tax status of a partnership.
Contents 1. Introduction to UK LLPs 2. Operational Matters of a UK LLP 3. UK LLP Tax Implications 4. UK LLP as an Investment Vehicle– Case Study 5. UK LLP as a Trading Vehicle– Case Study 6. Conclusion
1. Introduction to UK LLPs An LLP is a body corporate which has its own legal capacity. It can contract in its own name, hold property and assets in its own right, and is liable for its own debts and obligations. For legal purposes, an LLP is very similar to a limited company. It is a separate legal business entity that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. Below we will expand on the operational matters concerning the formation and management of a UK LLP. 2. Operational matters of a UK LLP A) Formation of a UK LLP
A LLP is incorporated by delivering the appropriate form to the Companies House (which principally just contains the name and registered office of the LLP and the name, address and date of birth of each of the initial members and must be signed by each of the initial members). Incorporation can usually be completed in a short period of time, and the Companies House issues a certificate of incorporation, just like for a new company, giving the LLP its own registration number. Unlike a private limited company, a LLP does not have articles of association which must be publicly filed with the Companies House. Members will often enter into a Partnership Agreement (setting out the rights and obligations of the members of the LLP) but that is a purely private document which does not need to be filed on any public register. LLPs have no restrictions about the activities they can perform or assets they can hold, nor any minimum share capital requirement.
LLP is formed by members, which are either Designated Members or Ordinary Members. There must be at least two Designated Members in the LLP (individual or legal entity, further a dormant legal entity can act as Designated Members)but there is no statutory maximum. A Designated Member has particular responsibilities, over and above Ordinary Members, similar to those of a company secretary (i.e. appointing auditors, signing the LLP’s FS, submitting the FS to the Companies House, notifying the Companies House of any changes in the LLP’s registered office, membership or name and others). Additionally, the LLP’s Partnership Agreement may provide additional power to the Designated Members whichmay resemble those of a director of a limitedcompany.
An Ordinary Member is expected to show a duty of care only in relation to those transactions he/she enters on behalf of the LLP (i.e. carrying out the LLP instructions, behaving honestly, and not allowing a conflict of interest). C) Partnership Agreement
A Partnership Agreement is a private document, not liable to be registered with the Companies House and therefore not public, whereby the Members provide any and all relevant matters concerning the relationship between the Members and the way the LLP is managed. A LLP can offer greater flexibility than a limited company in relation to profits – the Partnership Agreement can offer to vary the allocation of profits, different apportionment of income profits among members and allow for distinctions in percentages of profits payable to different members for different years. The internal corporate governance structure of an LLP is just as versatile and it is simple to make modifications to the legal rights and responsibilities of the members. D) Ongoing obligations
As a business entity, UK LLPs have ongoing management, fiscal and compliance obligations, including, but without limitation, to the following: • Filing annual accounts and confirmation statements • Registering the LLP and all the members for Self-Assessment before HMRC • Reporting any changes to HMRC and Companies House where necessary • Representing the LLP in any legal matters • Making sure the LLP is adhering to all forms of statutory compliance • Informing the registrar within 14 days if the membership of an LLP changes
3. UK LLP Tax Implications For UK tax purposes, the LLP is treated as transparent – which means that IF the members of the LLP are non-resident and IF the income of the LLP is non-UK source, then the LLP and its members will not be subject to UK taxation. Members who are non-UK tax residents are only liable to UK tax on UK-sourced income. Therefore a UK LLP with non-UK tax resident members, trading and operating outside the UK is not subject to UK taxation on its members. However, each non-UK resident member will have reporting obligations in the UK and may have tax obligations in its country of tax residence. It is an ideal corporate body to carry investment in a third country (i.e. non UK) when the members are non UK tax resident. Since 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 tax efficiencies.
4. UK LLP as an Investment Vehicle The structure chart below shows how a UK LLP can be structured with the purposes of carrying-out investments in non-uk assets or investments funds, with foreigninvestors.
A) LLP as an Investment Vehicle - Case Study
1) Purposes of the Structure: UK LLP to jurisdiction with a tax transparency, while maintaining full with the Investment Managers.
2) Two Investment Managers act as Designated Members (DM 01 and DM 02).
3) Investment Manager maintains full decision-making powers through efficient corporate governance provided in the Partnership Agreement.
4) Ordinary Members are non-UK investors whose funds will be managed by the Investment Manager B) Main Advantages:
a) Members of the LLP are non-resident and the investment results of the LLP is non-UK source, resulting in the LLP and its members not being subject to UK taxation. b) Investment Managers kept full decision-making powers through the execution of a customised Partnership Agreement fit for the investment purpose. c) Positive jurisdiction perception is an enabling factor when raising capital worldwide. * Please note that potential regulations and licenses under the FCA must be reviewed on a case by case basis. 5. LLP as a Trading Vehicle The structure chart below shows how a UK LLP can be structured with the purpose of carrying-out trading activities in non-UK markest, with non-UK members.
A) LLP as a Trading Vehicle- Case Study 1) Purposes of the Structure: Non-UK individuals wanted to provide services to the US Market. The UK LLP enabled individuals to use a reputable jurisdiction to conduct business while maintaining tax transparency which provided additional benefits in their local jurisdiction. 2) Non-UK partners (individuals) formed a UK LLP. 3) Services were sold to the US Market, hence income has not originated in the UK. 4) Under the individuals’ local jurisdiction, the UK LLP’s profits not repatriated to the members were not taxed locally as well*. Therefore, members were able to avoid paying UK corporate tax and defer income tax on their own jurisdictions until they decided to repatriate dividends. * Tax benefit to be reviewed on a case by case basis.
B) Main Advantages:
a) The UK LLP is cost-effective and easily manageable, so the day-to-day operations were not time consuming.
b) The UK jurisdiction is highly reputable and often clients will not have issues contracting with UK entities.
c) Members of the UK LLP were able to benefit from the combination of the UK LLP’s tax transparency and their local jurisdictions’ tax rules.
A Limited Liability Partnership has the advantage of taxation like a partnership combined with limited liability, corporate personality and organizational flexibility. By entering into an LLP, members get to protect their private assets. If the business should fail, they are only going to lose money they’ve invested in the partnership.
If flexibility is required for the internal business structure, then an LLP is excellent as a structure can be changed as and when by adding or removing members. On the other hand, the structure of a limited company is more rigid. London is one of the most important financial centres in the world. It is therefore a prestigious location with a good image and it is not recognised as a tax haven jurisdiction.
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International Structuring | Finance & Tax | Advisory