LLPs & LPs
LLPs, or limited liability partnerships, shouldn’t be
confused with LPs, or limited partnerships. The latter is much older, having
existed at least since 1907 when the Limited Partnerships Act was passed. LPs
are different from LLPs in that they are not bodies corporate and have to have
at least one partner whose personal liability is unlimited. If a partner has
limited liability, he can’t take any part in the conduct of the LP’s trade.
LPs have, therefore, always been something of a niche
entity. Currently they are popular vehicles for individual investments by hedge
funds in which the hedge fund managers can take direct personal stakes on a limited
partner basis; and because they are basically simply investors, the LP
structure is ideal in doing this without the tax complications of putting a
limited company in between the hedge fund investor and the business.
But for the general purposes of this report, it has to be
said that LPs are of very restricted interest, especially now that LLPs exist
and can secure basically the same tax benefits (of direct participation in
ownership of the business or investment) without the restrictions on input into
the management of the business, etc., that an LP brings with it.
Who Would Use An LLP?
There is a mythology out there that LLP’s are really just
for accountants and lawyers. Certainly, the history of the introduction of this
particular corporate vehicle has something to do with their being associated in
the public mind with large professional firms of this sort. Accountants, in particular,
wanted something which would give them limited liability, in short, at the same
time as enjoying the benefits of personal self-employment status, enjoyed by
all of the partners. It’s not surprising that the first LLP, and probably the
majority of the first few, were large firms of accountants.
The reality, though, is that LLPs are suitable for all kinds
of business, whether professional, trading, or investment. Investment LLPs, in particular,
are specifically envisaged by the legislation and commentaries.
The LLP As An Asset Protection Vehicle
So, the reasons why we are devoting a chapter to LLPs in
this report on asset protection are probably sufficiently obvious. Like limited
companies, LLPs can ‘ring fence’ business liabilities from the personal
financial situation of the members of the LLP.
As with a company, the limited liability protection which is
afforded by an LLP can be restricted in certain ways. If an individual member
of an LLP gives a personal guarantee to any creditor (usually a bank) the bank
can pursue that individual member if the LLP doesn’t pay its bank loan back.
As with companies, victims of negligence or purported
negligence on the part of an individual LLP member can sue that member as well
as the LLP to recover what he says he has lost. From the tax point of view, the
LLP provides protection against pay as you earn or VAT liabilities that are not
paid over to the Revenue for various reasons; but unlike a company, the tax
bill on the LLP’s profits is a personal liability of the members, and not a
liability of the LLP itself. (In this way, as in most others, the LLP follows
the way an unincorporated partnership works.)
On the other hand, as with companies, it is possible to set
up a ‘group’ structure, with the valuable fixed assets of the business,
perhaps, held within a ‘holding LLP’ which is then, in turn, a member of a ‘subsidiary’,
trading LLP. As with companies, the idea, here, is that any catastrophic financial
disaster striking the trading entity, being the subsidiary LLP, will leave the
assets of the holding LLP unscathed.
The above is an extract from our popular property tax report: Asset Protection & Tax. Get the full scoop here.
By Alan Pink
