Limiting the damage for members of LLPs
Limited Liability Partnerships are receiving a lot of attention from the Government at present, and new tax legislation will be introduced to limit some of the tax advantages of operating as an LLP.
These changes are likely to give rise to an increase in costs for many LLPs and may result in the LLP restructuring its business and financing or transferring its business to a limited liability company.
Steve Smith from Mercer & Hole Accountants gave me more details.
Members of an insolvent Limited Liability Partnership ("LLP") may well face significant personal liabilities.
Overdrawn current and capital accounts will have to be repaid to the LLP, together with – potentially – any withdrawals during the two years prior to the commencement of the insolvency. In addition, any unpaid income tax is a personal liability of the members, even if notionally deducted but not paid over to HM Revenue & Customs by the LLP.
This will come as a shock to many members who anticipated that the consequences of an LLP’s failure would follow the outcome for shareholders of a limited liability company. After all, an LLP has "Limited Liability"!
A member’s drawings will, for many members, be regarded as their "salary" and may well be paid after a notional tax deduction. However, drawings are in fact an advance in lieu of profits and if the LLP makes no profit, or a member’s share of profits is less than their drawings, or the LLP’s profit is not allocated to members, excess drawings are repayable.
If a member’s capital and current accounts together are in credit, after taking into account the member’s drawings, that member will not have a direct personal liability to the LLP. However, any payment to members that was made (i) at a time the LLP was unable to pay its debts, and (ii) during the two years before the formal insolvency began, may be claimed by the administrator or liquidator of the LLP under so-called clawback provisions.
The position may be even worse from a member’s perspective as the income tax liability for members on their share of the LLPs profits is a personal liability. If the amount of tax due is not paid by the LLP for any reason, HMRC will seek to collect the income tax due directly from the member. This is despite the deduction of notional tax at the time members received their drawings.
Clearly, an LLP member’s liability is not as limited as many members might expect. Each LLP will be different in its constitution and in its arrangements with its members, and members who are uncertain about the extent of their liability on the failure of the LLP should seek advice on their arrangements with their LLP.
If you would like some advice, do not hesitate to contact us and we can put you in touch with someone who can help.
Date: 6th March, 2014
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