LLP - can members take a sal/div split or do they have to take profit share?

imeldabye

Hi all, getting myself a bit mixed up here.
I have a new LLP (first one for me) - 2 partners/members.
I understand that they have to file
1. CH annual accounts and return
2. HMRC partnership return
3. 2 x individual tax returns
So far so good. Can they pay themselves salary and divs to reduce profit and own tax liabilities or do they have to take drawings and pay tax on profit/loss of biz?
Am I mixing accounting metaphors with the former?
I have trawled the internet and can't find much in the way of taxation of LLPs in this regard, praps because the answer is so obvious? :001_huh:
thanks all

Newbie

LLP offers limited liability protection but from a tax point its treated as a partnership, the profits are apportioned its attractive where flexibility is required, dividends cant be paid but salary can which will be subject to TAX & PAYE if applicable

reader

Newbie wrote: »

LLP offers limited liability protection but from a tax point its treated as a partnership, the profits are apportioned its attractive where flexibility is required, dividends cant be paid but salary can which will be subject to TAX & PAYE if applicable

I've only ever prepared accounts for a LLP once so please forgive me, but would the salary go into an account called "members' renumeration"?

imeldabye

newbie thanks for this- so just to clarify- no dividends though but can the basic salary be tax deductible then for P&L?

Monsoon

No dividends.

no point in paying a salary equivalent to a director's salary if it's an even split of profits.

jamesm96

If you want to get really technical and the client's situation justifies it, you can have Corporate Members in the LLP. So, rather than having John and Jane as partners in the LLP, you have John Ltd and Jane Ltd as partners, in which John and Jane are directors respectively, and they can then take a dividend from their companies' share of the LLP profits.

I had thought that you had to have at least 1 'natural' (i.e. human) member, but I've just looked and I can't see this anywhere.

peaman

I have a new LLP client that has 2 members, 1 human and 1 corporate. 100% of the profits are going to the human.

I looked into whether it is possible to change to 2 corporate members and I found the following in a CCH cpd course by Michael Steed...

'So a corporate member of the LLP, very similar to having a corporate member of a conventional partnership but we do need to sound a health warning here and that is HMRC look a bit askance at these types of provisions so you’ve got to be clear that there’s commercial justification.'

If HMRC look askance at having corporate members, does this mean it can definitely not be done, is there a way around this?

Does anyone have a definitive answer?

Monsoon

Precise Tax wrote: »

If HMRC look askance at having corporate members, does this mean it can definitely not be done, is there a way around this?

Does anyone have a definitive answer?

HMRC look askance as a lot of things. That's just their view.

If you have a commercial reason to have 2 corporate partners, that's fine. If you have a personal tax reason for doing it, that will be what they look askance at, but my understanding is it's legal, so they can whistle. They look askance at low salary high dividends but there's not much they can do about it if done properly.

Disclaimer: LLPs not my area of expertise, speaking from general knowledge only.

peaman

Yes, I know. I wish that HMRC said 'yes' or 'no', rather than 'looking askance' or 'frowning upon things', it would make life so much easier.

Purely personal tax reasons, it pains me to see someone pay so much tax, even when that someone isn't me!

I am tempted to just go for it and make both members corporate, but I don't want any comebacks as it is one of my personal clients. If it was a client of the practice I work in, I wouldn't be as concerned.

I was thinking of changing them from LLP to ltd, as I wouldn't have the above problem, but it is apparently harder to appoint new directors to a ltd company than it would to appoint members to an LLP. I mentioned this to the client and they didn't think that this would be a concern, they are happy to change in any way that I recommend.

LLP's not my specialty either!

Monsoon

Precise Tax wrote: »

it is apparently harder to appoint new directors to a ltd company than it would to appoint members to an LLP.

In what way?

In terms of HMRC, they have their interpretation of the law, we have ours. Mostly they overlap, but sometimes it's different. If you want it from the horses' mouth, look it up in the legislation and check case law. HMRC's view is not necessarily law.

TBH, I don't see the issue. If I as a sole owner of a business can run through a Ltd for tax and other reasons, why can't I and another Ltd co form a partneship for a certain joint project? I really don't see the issue.

peaman

I have read a number of comments, such as...

'The most significant of these is that an LLP retains the flexibility of a traditional partnership with regard to the members, who can join and leave freely, and in certain circumstances can be removed from the LLP by the other members , unlike the shareholders of a company, who own a specific asset (their share), and can only leave if they sell the share (and it is generally difficult to remove a shareholder against their will)'.

And other comments about CGT, share valuations etc., which I can't find at the moment, but they all implied that LLP's are much easier for members to come and go, than it is for directors.

Also, I found the following from HMRC business income manual section 72115...

'If an LLP carries on a trade then each registered partner is taxable on the income they derive from the LLP as self-employed trading profits'

But I know corporate members are allowed!!

However, the client is happy to stay as they are with 1 corporate member receiving no profits and the individual member receiving 100%.

They were recommended to set up like this by a very large accountancy practice in the city, that apparently have lots of experience with LLP's. But I can't help thinking that there must be a more tax efficient way to do things.

I will keep researching!!