The primary reason why limited liability partnerships (LLP) often convert into a company is so members can limit their personal liabilities. Partnerships have no legal identity, which makes each member liable for damages. In a limited liability company (LLC) the partners are shareholders, meaning they are not personally responsible in the event of insolvency. The extent of their liability is purely based upon any unpaid amounts regarding the issue of shares. If the shares are fully paid, which is generally the case, members won’t have any liability.
A limited liability company is generally considered a more attractive option for investors, as instead of becoming partners they will become shareholders; therefore, converting to a company can make it easier for businesses to acquire capital.
How LLPs Operate
Members of limited liability partnerships are taxed as if they are self-employed, rather than through the business itself. This allows members to take advantage of various self-employment tax benefits that would otherwise be unavailable. In addition, they get to retain liability status and have a greater level of protection than if they were sole-traders. Due to the ever-changing tax legislations surrounding LLP’s many partnerships opt to convert to a limited liability company as the costs of retaining a partnership aren’t always financially viable.
The Conversion Process
When a limited liability company is formed from a partnership, the company must buy or receive the net assets of the business in exchange for shares. This makes the company legally liable for these assets, and thus, the business’s responsibilities. To start the conversion process all of the LLP’s members must agree to transfer these business assets. However, if certain liabilities can’t be settled before the procedure begins, arrangements can be made to leave certain debts with the LLP.
Arranging the transfer can be a costly process that will often require the complete redrafting of contracts. This could include agreements with suppliers, financers and lease operators, etc. In most circumstances any outstanding debts with these creditors will have to be settled before the transfer takes place.
Common Issues With The Transfer Process
When a limited liability partnership is converted into a company, the members’ individual debts will also be transferred. Members may choose to leave their personal debts with the LLP; however, additional tax may be required if the LLP discontinues conducting business for profit. This can result in significant costs for members. It is, however, possible to bypass this issue if the money that’s owed by individual members is included as a balance of goodwill from the business. If there are no issues regarding these fees a limited liability partnership should be able to convert into a company without any problems.
Cash flow problems during the transfer itself are another common issue. If there is something wrong with expenses members of the LLP could choose to place the business into Administration or arrange a Company Voluntary Arrangement (CVA). If the business has to take this approach it will be subject to corporation tax, which could result in more expenditure for members with liabilities.
Converting a limited liability partnership into a company can have plenty of benefits; however, it isn’t always the most financially viable option, especially if the business has members with debts. In addition, it requires a great deal of planning and preparation, and a thorough examination of cash flow forecasts to ensure that both taxes and legal aspects are covered.
Limited liability partnerships are constantly under strain due to frequent changes regarding tax for the self-employed. Many partnerships are making the transition to limited liability companies to bypass issues relating to these changes. However, businesses that take this approach should always assess the extent with which they make their company liable for damages. Some businesses set up limited liability companies to run alongside a partnership. This can provide more flexibility and further protection against risky ventures that could harm the LLC.
In short, there are advantages of both limited liability partnerships and limited liability companies. Deciding the best route isn’t always clear and can significantly vary according to the way with which business is managed. There are legal secretary courses in London that could help you make a more informed decision about which method to choose without having to hire an external team. Profitability, investment needs, and member liabilities must always be thoroughly assessed in order for businesses to make informed decisions.