Although LLPs are a form of partnership, the assets arent owned by the members; instead the LLP has its own corporate identity thats liable. This can provide a greater level of protection for members.
Limited liability partnership operations
Members are taxed on the LLPs income rather than the LLP itself, meaning that members work on a self-employed basis. In fact, one of the primary reasons behind the formation of LLPs is so members can reap the benefits of self-employment tax regulations, while retaining limited liability status. However, due to frequent changes within these tax regulations, costs can significantly increase. Therefore, many partnerships eventually choose to form a limited liability company instead.
Transferring to a limited liability company
In order for the conversion to take place, all of the members within the LLP must agree to transfer the assets of the company. This could require the drafting of extensive contracts, which can result in substantial legal fees. In addition, customer agreements, supplier agreements, finance agreements and lease agreements, etc, will need to be amended to reflect the changes. Agreements will also be required from creditors, and any liabilities will most likely have to be settled before the transfer takes place.
Problems with transferring business assets
One of the problems that LLP members often encounter during the asset transfer process is having certain liabilities bound to themselves if their expenditure has surpassed profits. This means that when the LLP is transferred to a company, so will the individuals debts. For this reason, many members will choose to leave their debts with the LLP. The main issue with this is that additional tax may be required if the LLP doesnt continue conducting business for profit.
Planning the transition
When planning for a transition, it is possible to deal with the amount of money thats owed by members if the value of the transfer includes a balance of goodwill. This will provide capital for tax disposal, which will be assessed on an individual basis and could result in a large reduction of fees owed by individual members. An LLP should be able to transfer to a limited liability company providing that there are no issues regarding this balance.
If the LLP encounters cash flow problems during the course of the transfer, members could choose to place the LLP into Administration or reconstruct the business as a Company Voluntary Arrangement (CVA). However, when this occurs, the tax status of the LLP will change and it will be subject to corporation tax rules. This could result in significant costs for members who have liabilities within the LLP.
Transferring an LLP into a limited liability company isnt always a straightforward process; it requires a great deal of planning and preparation. Its also important that the business has the capital to cover legal proceedings and any tax issues along the way.
Due to changes in tax legislations, which are increasing costs for LLPs, many businesses are opting to change. However, when the LLPs liabilities move members closer towards insolvency, members should carefully consider the extent in which they make themselves liable, as this could result in additional taxes. Compromises with creditors can usually be arranged if these costs are mitigated from Administration or a CVA.
Regardless of the business, careful consideration of legal, tax and insolvency aspects must be taken into account before the transfer procedures begin. Every LLP manages business in a different manner, and determining the final impact of trading should always be calculated on an individual basis.
Aaron Hopkins is a professional writer. This article was put together in collaboration with Steve Smith at Mercer Hole.