Tax Return Due Date 31st January 2018
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Partnership and Limited Liability Partnership

Harish Verma

The partnership

A partnership is defined as two or more persons carrying on in business with a view to profit. There are three forms of partnership and they are each governed by different partnership acts. These create “defaults” as to the way that this form of vehicle is regarded in law.

Certain persons are not able to form partnerships these are:

  • Charities
  • Not-for profit organisations

Two or more persons who hold a joint or common interest in land are not necessarily forming a partnership even though they may split the profits generated by their land or buildings. For tax each is assessed on his share of income less alllowable expenses and no partnership tax return is required for a property business.

By concession a trading partnership which also has insubstantial income from land and property will still be assessed as if all its profits are trading profits.

Planning point: partnerships are relationships and all human relationships may go wrong. Create a partnership agreement to determine (the following list is an absolute minimum):

  • Profit share
  • Capital contributions
  • How to deal with the arrival and departure of a partner
  • Succession
  • Death of a partner.
  • Divorce of a partner (essential if you are income shifting).

Types

There are three different types of partnership:

The conventional partnership.

Many of the key features are similar to those for a sole trader:

  • Partners are responsible for one and another’s debts.
  • Partners are taxed on all the profits, although their share of the profits will vary by agreement.

However. there are some significant differences:

  • If the partnership makes a loss, those partners who are not fully participating in the business may be restricted from claiming sideways loss relief (offsetting losses against other income).
  • Individual partners may rent property to the partnership to use in its business, and charge it rent.

The limited liability partnership (LLP)

This trading vehicle is a sort of cross between a conventional partnership and a company; it has the best features of each. LLPs are governed by the 2000 Limited Liability Partnership Act and the 2006 Companies Act.

Key features

  • A LLP is a body corporate: a separate legal entity to its members (the partners).
  • LLPs have designated partners who are the equivalent to company officers.
  • LLP accounts are filed with Companies House.
  • Partners have limited liability unless:
    • The LLP becomes insolvent, and the partners knowingly allowed this to happen, in which case they may be required to repay their profits of the previous two years.
    • A partner is found to be at fault at a time when he was acting under his own personal capacity.
  • A LLP is taxed transparently, as if it were a conventional partnership, rather than a company.
  • Losses are restricted in proportion to each partner’s capital contribution.
  • LLPs are subject to substantial amount of tax anti-avoidance legislation.


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