United Kingdom LLP | LP | LTD
Choice of entity
There are three principal ways for a foreign investor or company to carry on business in the UK. You may:
• register a UK establishment;
• incorporate a private limited company; or
• incorporate a limited liability partnership.
Private limited company
A private limited company is a separate legal entity with its own assets and limited liabilities. If you choose to set up a private limited company as a UK subsidiary, the parent company will not be liable for the debts and other liabilities of the subsidiary beyond the amount of the subsidiary’s share capital, unless the parent company has provided an express guarantee in respect of the subsidiary’s liabilities.
On the one hand, a private limited company:
• is the most common form of trading entity in the UK;
• can be more credible than a branch operation and is often more desirable for the purposes of holding regulatory licences with its trading activities ring fenced from its parent company;
• offers flexibility of ownership (it can have one or more shareholders).
On the other hand, it must comply with accounting, audit and regulatory requirements. The main compliance obligations for a private limited company are:
• filing a confirmation statement on the anniversary of incorporation with the Registrar of Companies confirming that information held by the Registrar, such as its share capital and officers, is up to date;
• notifying the Registrar of Companies of any event-driven changes to the company (for example, resignation and appointment of directors, a change in the share capital and a change of registered office address); and
There are many other forms of partnership such as general and limited, as well as other types of company including public, companies, company limited by guarantee and a European company Societas Europaea (SE). The most appropriate vehicle will depend on specific facts and circumstances.
Limited Liability Partnerships
Historically a partnership structure has been the vehicle of choice of ‘people businesses’ such as accountancy and law firms many of which have operated as partnerships for more than a century. Until 2000, these businesses would have operated as general partnerships or limited partnerships. Limited Liability Partnerships (‘LLPs’) have been in existence in the UK since 2000 and have become increasingly popular. They have been widely adopted across various sectors e.g. insurance brokers and architects.
Like a limited company, an LLP is a body corporate which has a separate legal personality and is governed by the provisions of the Limited Liability Partnerships Act 2000 and Companies Act 2006. It is therefore an alternative to a simple company limited by shares.
As a body corporate, profits, assets, and liabilities belong to the LLP and not to its members. Much of existing company legislation, set out in the Companies Acts, the Insolvency Act 1986 and the Company Directors Disqualification Act 1986 also applies to an LLP.
An LLP is deemed to be transparent for UK tax purposes and therefore tax will be assessed on the members individually rather than on the LLP entity.
All the Companies Acts provisions on financial disclosure which apply to companies also apply to LLPs, other than those relating to share capital. The Limited Liability Partnership Act 2000 (‘The Act’) and the Limited Liability Partnership Regulations 2001 (‘The Regulations’) also apply many of the other company disclosure requirements to LLPs, so that:
• the appointment of new members must be notified to Companies House as must the retirement of existing members; and
• an LLP must have a registered office and any change in that office must be notified to Companies House. In addition, an LLP is required to deliver a confirmation statement to Companies House confirming that the information held by the Registrar, such as the names and service addresses of the members, is up to date.
The key differences between a limited company and an LLP are:
• an LLP does not have a Memorandum or Articles of Association, it is governed by its own unique and private agreement which may be amended whenever desired;
• an LLP does not have share capital, it is owned by its members through their capital contribution;
• an LLP may have profit sharing members who have no capital share in the LLP;
• an LLP is transparent for direct tax purposes.
The key commercial benefits for adopting an LLP are:
• limitation of personal liability for the partners;
• flexibility to adapt the business structure as commercial needs change;
• flexibility over the allocation of profit shares to each individual partner to align reward with performance (of the individual, the business unit or the business more widely);
• a potential source of working capital for the business if the LLP decides to utilize individuals’ undrawn profits.
As well as commercial benefits for the business, an LLP offers an enhanced ability to incentivise and retain personnel including:
• the opportunity to offer key individuals a ‘stake’ in the business by becoming a member of the LLP;
• running a business and working within a collegiate, collaborative environment.
Members of an LLP
A member of an LLP may be any natural or legal person, e.g. an individual, a company or another LLP, and there is no limit on the number of members that an LLP may have. Members are those who subscribe upon the registration of the LLP and those who join subsequently with the agreement of existing members. Partnership in the LLP ceases upon the retirement or death of the relevant member, the dissolution of the LLP or by agreement of the members.
The Act and Regulations introduce a separate class of members called ‘designated’ members who are appointed upon registration or by agreement amongst the members. Designated members are responsible for ensuring compliance by the LLP with procedural and administrative requirements imposed by the Act and the Regulations, and might be compared to company secretaries.
If there were fewer than two designated members appointed, every member would be deemed to be a designated member.
On becoming a member of the LLP, every member must complete a Form LLAP01 or LLAP02 (Appointment of a Member to a Limited Liability Partnership). The form includes the following information about the member:
• full name;
• usual residential address (office addresses cannot be used)
• service address;
• date of birth.
By signing the form the person is consenting to be a member of the LLP.
As a consequence of the filing requirements, the residential address of every member is obtainable by members of the public from Companies House. It is however technically possible for a member of an LLP to apply to the Secretary of State for a confidentiality order as to his/her address if they are considered ‘at risk’.
After a member has become a member of the LLP, any subsequent change in his/her name or address must be notified to the Registrar within 28 days of the change on Form LLCH01.
What are my duties as a director?
As a director, you are responsible for the day-to-day management of the company and you are subject to various statutory duties that, if breached, can result in personal liability. The duties, which are set out in the Companies Act 2006, include the requirements to:
• act in accordance with the company’s constitution and only exercise your powers for the purpose for which they were conferred; and
• act in a manner that you consider, in good faith, to be the most likely to promote the success of the company for the benefit of its members as a whole. When exercising this duty, you must have regard to a number of issues, including:
– the likely consequences of any decision in the long term;
– the interests of the company’s employees;
– the impact of the company’s business on the community and the environment;
– the need to foster the company’s business relationships with suppliers, customers and others;
– the desirability of the company maintaining a reputation for high standards of business conduct; and
– the need to act fairly between members.
• In discharging your duties, you must also exercise:
– reasonable skill, care and diligence; and
– independent judgement.
You also have a duty to avoid a situation in which you have, or may have, a direct or indirect interest that conflicts with the interests of the company and to disclose the existence of any interest in any proposed or existing contract with the company. You also have a duty not to accept benefits from third parties if they could give rise to a conflict of interest.
In cases of actual or prospective insolvency, your duties are still owed to the company but you must act in the best interests of the creditors, rather than its shareholders. Personal liability is also imposed in certain situations for permitting an insolvent company or prospectively insolvent company to continue trading, unless you can demonstrate that it is beneficial for the creditors to continue to do so.
The above is a merely a summary of a director’s duties but you should be aware that this can be a complex and technical area of law.
There is one main tax on companies’ profits, which is corporation tax and which is currently levied at a rate of 19%. By 2020 the UK rate of corporation tax will reduce to 17%. Rates are fixed in advance and announced in the Budget each year. Some industries do attract other profit related taxes but these specifics are outside the scope of this paper.
Support from HMRC
Before moving into the detail of the corporate tax rules, it is worth noting that HMRC have recently announced that they will be providing additional support to mid-sized businesses (defined as businesses with turnover of more than £10m and/ or at least 20 employees) that are experiencing certain types of growth to help them understand the tax issues they may face at their particular stage, including information on incentives and reliefs they may be able to claim.
The support will be in the form of helping business to:
• understand any new tax issues and reporting requirements;
• get the tax right before the return is filed;
• consider reporting and governance risks caused by the growth of the business;
• access financial incentives and reliefs the company may be eligible for; and
• access other HMRC specialists, services and guidance that are relevant.
Support is restricted to certain types of growth listed below but may be available for other types of growth subject to HMRC decision:
• turnover increased by 20% or more in the last 12 months, where this increase is at least £1 million;
• combining with, or buying, companies or other business organisations, or their operating units, resulting in growth of the business;
• changing the composition of a group of companies for the purpose of business growth (excludes insolvency);
• initial and subsequent offerings of shares on any stock exchange for public purchase;
• introducing capital that increases the balance sheet total by more than 20% where that capital is at least £1 million;
• first time notification of meeting Senior Accounting Officer (SAO) conditions and completion of the first SAO certificate;
• paying corporation tax by quarterly instalments for the first time because profits are above the ‘upper limit’;
• making VAT Payments on Account for the first time, because in any period of 12 months or less you have a total liability of more than £2.3 million;
• selling goods or services from the UK to another country for the first time; and
• setting up a business operation in a new country.
This is an indication of the more open and proactive relationship HMRC is looking to adopt with tax payers.
Registration for UK corporation tax
Within three months of commencing trade or becoming active, a UK company or establishment is required to notify Her Majesty’s Revenue & Customs (HMRC) that it falls within the charge to UK corporation tax. Failure to notify can result in a penalty.
Generally, a UK company or organization is considered to be active for Corporation Tax purposes when it is, for example:
• Carrying on a business activity such as a trade or professional activity;
• Buying and selling goods with a view to making a profit or surplus;
• Providing services;
• Earning interest;
• Managing investments; and
• Receiving any other income.
This definition of being active for Corporation Tax purposes is not necessarily the same as that used by HMRC in relation to other tax areas such as VAT, or by other government agencies such as Companies House. The need to register for Corporation Tax can therefore often occur earlier than may be expected (e.g. when you start buying/selling, when you start advertising, renting a property or employing someone). It may also not match definitions in the various accounting conventions that are used to prepare audited accounts, such as the Financial Reporting Standards (FRS) issued by the Accounting Standards Board, or the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.
Corporation tax rates
The rate of corporation tax applicable in the financial year 2018 (being 1 April 2017 to 31 March 2018) and financial year 2017 is as follows:
Rate of corporation tax Financial year 2018 - 19%
Rate of corporation tax Financial year 2017 - 20%
For financial years 2017 and 2018 (i.e. the year from 1 April 2017 to 31 March 2018 and the year from 1 April 2018 to 31 March 2019), the main rate of corporation tax is 19% (section 3 of CTA 2010). This rate applies to all the profits of a company, except North Sea oil and gas ring fence profits.
For financial year 2019, the corporation tax rate will remain at 19%. FA 2016 provides that, for financial year 2020, the corporation tax rate will be 17%.