Limited Liability Partnerships Services
The Limited Liability Partnerships Act was enacted in 2000 and created the legislation through which partners in a business could benefit from limited liability.
Whereas a Limited Liability Partnership (LLP) is a corporate entity, the profits and losses of the LLP are shared by its members who are responsible for their own tax arising thereon. This can make LLP structures and financing arrangements between members of an LLP and the LLP quite complex.
When an LLP faces financial difficulties, it is important to understand the consequences of a cessation of the LLP’s trade, both upon the LLP and its individual members. If there is a members’ agreement this will provide some guidance. If there is no members’ agreement there are regulations which will apply. If the business of the LLP is viable, Mercer & Hole can advise on the most appropriate way in which it may be restructured. The Insolvency Rules covering an Administration and a Company Voluntary Arrangement as applies to companies, can be used to rescue the LLP’s business as a going concern. An Administration for the LLP has the benefit of a moratorium, preventing creditors from commencing or continuing with any legal proceedings against the LLP and, in so doing, creates the opportunity to sell the LLP’s business as a going concern should this be appropriate.
The Insolvency Rules covering Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation and Compulsory Liquidation as applies to companies also apply to LLP’s, with some minor variations. If the future business for the LLP is not viable, or otherwise the LLP has ceased its trading activities and the members agree that it should be wound-up, then Mercer & Hole can provide specialist advice.
Whereas an LLP’s financial viability may be improved through restructuring, it is paramount that the impact of the proposed restructuring upon the members and the tax consequences be considered in detail. A member’s drawings from an LLP are in anticipation of profit and until profits are allocated to each member, a member’s drawings are repayable, unless the member is owed money by the LLP, or the members’ agreement states otherwise. Where an LLP is in financial distress and is in need of restructuring, it is likely that the LLP has made significant losses and will have no profit to allocate to members. If so, the extent to which the members owe the LLP must be evaluated as part of the restructuring programme. Furthermore, as the members are individually taxed on their share of the profits and losses, as appropriate, the members’ liability to tax should also be established as part of the restructuring programme. It is important to appreciate that the LLP itself is not subject to tax on its profits and losses unless it ceases to be active or is placed into liquidation – then it is taxed as a company. This may have a significant impact upon the tax liability of the LLP’s members, e.g. loans to members attract a tax liability at 25%, benefit in kind rules may apply e.g. to members’ cars etc. However, there may be some mitigation for tax arising on capital gains as assets gifted to an LLP are rebased on liquidation, ie, they are deemed to be held within the corporation tax regime at market value on the date of acquisition. Consequently, the restructuring programme should identify the tax arising on profits or losses to be realised after the LLP is placed into liquidation.
Two of our articles, Conversion of a Limited Liability Partnership (“LLP”) into a Company and Insolvent LLPs - The Members Nightmare set out more detail on aspects affecting an LLP.
Mercer & Hole has experience and expertise to advise on restructuring LLP’s and advising members on the financial and tax consequences of formal restructuring and implementing turnaround strategies effectively.
Our Licensed Insolvency Practitioner Partners and Directors have assisted with the financial restructuring of many financially distressed and solvent Limited Liability Partnerships If you would like our advice, do not hesitate to contact us.