tax planning for partnerships – comparison of structures mark briegal, partner

Tax Planning for Partnerships – Comparison of StructuresMark Briegal, Partner

Aaron & Partners LLP

Agenda

• The options• Pros and Cons• Key features and comparisons• Tax• Corporate and Hybrids

• Own use and clients’ use

LLP?Company?

Partnership?

The Options

• Sole trader

• General partnership (GP)• Limited Partnership (LP)• Limited Liability Partnership (LLP)• Limited Company (Ltd)

General Partnership - Overview

• Partnership Act 1890

• Not a separate legal person

• No formal formation or incorporation

• Relationship between the parties

• Default rules, but partnership deeds important and common

• Tax transparent

• Self assessment – No accounts

Limited Partnerships - Overview

• Limited Partnership Act 1907

• Formal registration

• Limited liability for some; but must have one general partner

• Limited partners must not participate in management

• Tax transparent

• Self assessment – No accounts

LLP - Overview

• Limited Liability Act 2000

• Limited liability

• Incorporation and registration

• Disclosures

• Tax transparent

• No capital maintenance

• Self assessment

• Audit

Companies - Overview

• Companies Act 2006

• Incorporation and registration

• Shareholders

• Employees and officers

• Corporation tax

• Profit extraction

• Some tax reliefs

• Incentive plans

Limited Company - Pros & Cons

Advantages• Risk management• Recognised vehicle for M&A

activity• Relatively low set up and

operational costs• Potential goodwill extraction• Retained profits taxed at

corporate rates• Better structure for ABS &

share incentives

Disadvantages• Inflexible succession

planning / ERS• Benefits in Kind regime –

particularly cars• Very expensive:

– NIC costs– PAYE– NIC– Cash flow

Incorporation

• A corporate entity – the future traditional model?• Limited liability• Mixture of external, internal and bank funding• Profits belong to company – reflected in share value• Lower tax rates on retained profits • Separation of ownership, management and

employment• Goodwill recognised• Public disclosure

Categories of Partner

1. Full partners – “equity partners”

2. Limited partners

3. Fixed share partners

4. Fixed share equity partners

5. Corporate partners

6. Sleeping partners

7. Salaried partners

8. Shadow partners

9. Non resident partners

10. Trusts

11. Companies

1. Designated Members

2. Equity Members

3. Non-equity Members

4. Fixed Share Members

5. Restricted Members

6. What happens to Salaried Partners?

7. What happens to Associates?

8. Can you have directors?

9. Promotion and demotion?

Categories of Members

Things to Consider

• The business • Is it trading or investment?• Assets held• Risk• Profit retention• The owners• Residence• Domicile status• Management

• Tax position

(losses/other income)• Family position• The employees• Key talent• Incentive plans• Retention strategies• The future • Growth, succession and/or

exit strategy

Comparing the options

Sole Trader

GP LP Ltd LLP

Separate legal personality

N N N Y Y

Tax transparent Y Y Y N Y

Limited liability N N Y Y Y

Audit N N N Y Y

Publicly available accounts

N N Y Y Y

Loss relief against personal income

Y Y Y N Y

Employment legislation

N N N Y N

Requirement to have written constitution

N N N Y N

Comparing the options 2

Sole Trader

GP LP Ltd LLP

Entity owns assets and owes liabilities in own right

N N N Y Y

Distinction made between ownership and management

N N Y Y N

Able to have tax efficient incentives

N N N Y N

Ability to give floating charge over assets

N N N Y Y

Transferable shares N N N Y N

Restrictions on repayment of capital

N N N Y N

Income tax charged on retained profits

Y Y Y N Y

Tax Drivers

Highest rate of income tax

Employers National Insurance

Corporation tax (small companies/full rate)

Capital gains tax

2012/13

50%

13.8%

20/24%

10/18/28%

2013/14

45%

13.8%

20/23%

10/18/28%

Tax Drivers

Some Partnership Tax Issues

• LLP trading losses:– Belong to the member rather than the LLP– No loss relief available to the LLP – the member will claim

appropriate tax relief in their tax return• Capital gains for members can arise:

– Disposal to third party– Distribution of assets to a member– Changing profit shares and adjustments posted through

accounts– Changing profit shares and payments made between

members

Corporate & Hybrids - Professions

Professionals face commercial challenges:

• Need to generate capital internally

• Attracting external investment• How to provide for employee

participation through tax effective remuneration

• Building capital value• Retention and incentivisation

of new or existing partners

Hybrid Structures – Established Businesses

• LLPs - hybrids• Partnerships/LLPs - corporate

partners• Company - LLP subsidiaries• Company - LLP hive downs• VC/PE partnership and real

estate partnerships and funds• Company - incorporation and

dis-incorporation

Hybrids - Service Companies

• Used as a vehicle to provide professional and support staff • Possibly practice services - e.g. HR, marketing etc• May be commercial advantages of operating a service

company as part of a growth or acquisition strategy• Service company re-charges at cost or small margin• Adjust taxable profits under transfer pricing rules

Corporate & Hybrids

• Introduction of a corporate member• Corporate has a share of LLP profits• Retains working capital at lower tax rate• After tax cash can be contributed to the LLP • Possibly recycle members’ capital• Flexibility for rewarding members• Incentivise employees through share ownership

LLP Structures

LLPLLP

Member A

Member A

Member B

Member B

Member C

Member C

Limited CompanyLimited

Company

Subsid A

Subsid A

Subsid B

Subsid B

AA BB CC

LLP Sub A

LLP Sub A

LLP Sub B

LLP Sub B

Holding CompanyHolding

Company

LLP Structures

LLPLLP

Member A

Member A

Member B

Member B

Member C

Member C

Limited CompanyLimited

Company

Subsid A

Subsid A

Subsid B

Subsid B

AA BB CC

LLP Sub A

LLP Sub A

LLP Sub B

LLP Sub B

Holding CompanyHolding

Company

Outside InvestorOutside Investor

Hybrids – Private Equity

General PartnershipLimited Partnership

LLP

General PartnershipLimited Partnership

LLPFund VehicleLimited Partnership

Fund VehicleLimited Partnership

UK AdvisorLLP

UK AdvisorLLP

General PartnerCompany

General PartnerCompany

Principals

Principals

Portfolio Investments

Fee

Services

How to remove?

• Directors are employees with full employment rights

• Partners and members are self-employed with only discrimination rights

• Good employment contracts• Good partnership and

members’ agreements• De-equitisation• Expulsion

Summary

• Pros and cons to all structures• What is important?

– Flexibility– Incentivisation– Privacy

• Tax implications• Hybrids can give some benefits of all options

mark.briegal@aaronandpartners.com

01244 405563