Here's one for you...
I've been pondering over the structures that get used where an individual forms a limited company and then forms an LLP with himself and the company as partners, then carries on the trade through the LLP, varying the partners profit shares potentially at will.
It's been suggested that the limited company partner needs to have a trade in order for the shares to qualify for entrepreneur's relief.
Is it possible though for the limited company to be the holding company of a trading group? A group for this purposes is a company and its 51% subsidiaries (essentially a body corporate in which the holding company holds at least 51% of the ordinary share capital). Companies limited by guarantee won't count unless they have an ordinary share capital. The same would seem to apply to LLPs.
Is there any restriction though on forming an LLP with a share capital. There doesn't seem to me to be, but perhaps I'm missing something?
That doesn't answer the question
An LLC is a US entity the nature of which varies from US State to US State.
An LLP is a body corporate the business income of which is tax as if that business is carried on by a partnership.
My question is why can't it (under its LLP memorandum/agreement) have a share capital? Stating that it can't isn't an answer to that question.
Where's Graham Buckell when you've got a quandry?
My issue is that it seems to me that an LLP, whilst it can't be a "company" because of S.1273(2)(b) CTA 2009, it is still a "body corporate" for the purposes of S.1154 CTA 2010 and so capable of being a 51% subsidiary if it has an ordinary share capital.
Source of suggestion?
The company IS trading, as a partner in a limited liability partnership. Though an LLP is a separate body corporate for legal purposes, for tax purposes a limited liability partnershp and an ordinary partnership are no different.
As pawncob has already said, only companies can have share capital. If you really want to have the company exert control over the LLP then you simply need to put a partnership agreement in place where the limited company has voting rights in excess of the other members.
I'm the source of the suggestion
My question is a wholly hypothetical one at this stage, with which I'm musing.
I'm perfectly well aware of how LLPs and companys are taxed and a corporate member of an LLP isn't trading in its own right, it is a member of an LLP. Tax law simply says (and I'm aware of where and in what form it says it) that the business carried on by an LLP shall be taxed on the members as if they are partners in a partnership. That does nothing to alter the legal nature of an LLP, nor other tax consequences that flow from that legal nature. If an LLP doesn't carry on a business, but has passive investment income that income is liable to Corporation Tax.
My aim is not for the corporate member to exert control over the LLP, it can do that by being a member in the conventional fashion. My aim is to consider whether it is possible to make the LLP a 51% subsidiary for the purposes of making the corporate member the holding company of a trading group for entrepreneur's relief.
I am asking the question why can't an LLP (a body corporate in law) have a share capital? The question isn't addressed if you simply say that an LLP can't have a share capital. If you're of the opinion that an LLP can't have a share capital, I'd appreciate your stating why you think this particular type of body corporate is unable to create and issue ordinary shares.
As previously stated, my issue is that it seems to me that an LLP, whilst it can't be a "company" because of S.1273(2)(b) CTA 2009, it is still a "body corporate" for the purposes of S.1154 CTA 2010 and so capable of being a 51% subsidiary if it has an ordinary share capital
http://en.wikipedia.org/wiki
http://en.wikipedia.org/wiki/Limited_liability_partnership#United_Kingdom
http://www.companieshouse.gov.uk/about/gbhtml/gpllp1.shtml#ch1
It may be a distinct legal entity, but it's "incorporated" as a partnership, and defined as such, so no shares. It may be a body corporate for tax purposes, but it's incapable of being a 51% subsidiary, as it doesn't have any shareholders.
@Pawncob
I don't want to be rude, but the mere fact that you're referring me to wikipedia, and simply repeating otherwise unsupported assertions, when I'm referring to legislative source is indicative that you're not someone that finds themself incapable of dealing with the question that I'm raising.
If it's your opinion that an LLP cannot issue shares, then where in law does it say so?
I accept that there is nothing in law that requires an LLP to have a share capital, but I can find nothing in law that says it cannot.
Wrong question
The question you need to be considering is not why an LLP cannot have share capital, but why a company can.
The answer is that membership of a company by means of shares is specifically written into the companies legislation. There is no such provision for membership by shares in the LLP legislation. If you want something else from a statutory source to back that up, take a look at the list of forms at Companies House. There are a huge number of forms REQUIRED to be completed regarding share capital for companies. However, you can go through the entire list of forms for an LLP and not find a single reference to share capital. If LLPs could have share capital, would you not consider it odd that Companies House would not require the same information they demand from companies? If that's not enough for you, I would suggest ringing the Companies House helpline. Unlike helplines at certain other government departments, I've always found they answer promptly and deal with questions in a knowledgeable and helpful manner.
I feel you are getting hung up on the fact that both companies and LLPs are body corporates. Just because of certain legal similarities, almost entirely related to the limitation of liability of members, this does not mean they are anything like the same in all aspects.
As regards whether the company is trading or not, what do you consider the position for individuals in an ordinary partnership? If a person is a member of a partnership that conducts a trade, do you consider them not to be trading because they are not doing it as an individual? Why should the position be different just because the member is a company and the partnership enjoys limited liability?
Columbus...
... you've just got to accept that the world's flat.
Thanks Stephurhan. I'm not getting hung up, I'm just blue sky thinking. I have read CA 2006 and LLPA 2000, as well as the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. CA 2006 is prescriptive about how a company must be constituted (ie either unlimited or limited either by shares or by guarantee). Now the interesting thing is that it goes on to say that a company limited by guarantee cannot also have a share capital. Why would it need to say that if the answer was just, because it can't.
LLPA 2000 is less prescriptive. An LLP must be incorporated by a simple document (it need not be a memorandum of association, but I don't see anything that says it can't be) and it must have (at least two) members who intend to carry on a business. My question is, and remains, what is there in law to stop an LLP forming itself by memorandum of association, creating a share capital, to be issued to the subscribers and subsequent members.
I know that the Companies House helpline will tell me what you're telling me. But the until some proof is offered, the world isn't flat just because everybody says so.
With respect to the trading point, it's not the partners that are trading, it's the partnership. In a "normal" partnership, "partnership is the relation which subsists between two or more persons carrying on a business in common". An individual withdrawing from a partnership will qualify for entrepreneur's relief, as it is the disposal of part of a business. Unless the corporate member is trading (or is the holding company of a trading group), the disposal of shares by a member of that company will not so qualify.
what is there in law to stop an LLP forming itself by memorandum of association, creating a share capital, to be issued to the subscribers and subsequent members.
If the answer is "nothing", as you think, where (and under what enactment) are you going to register this entity? If you want to believe it's a "company", go ahead, but those of us in the real world still think of it as a partnership.
Limited by guarantee
I would say the reason for that sentence is to clarify that the two forms of limited company, shares and guarantee, are mutually exclusive. It would be just as valid for the legislation to say that a company with share capital could not also have members with limiting by guarantee. (this is implied by the sentence in the legislation)
Whilst I admire the attempt to think outside the box I think, as you have found here, you will have great trouble getting anyone to accept that an LLP can have share capital. They will almost certainly cite exactly the arguments shown in this thread. You will therefore have an up-hill struggle asserting to any statutory body that an LLP is a 51% subsidiary by means of share capital however you set up the documentation to achieve this.
The thing that bemuses me is what you expect to achieve through use of share capital that cannot be achieved by a suitably worded LLP agreement. If a corporate member is given control of the LLP through this, would that not be enough for your purposes? If not, I'd be interested to know why you think so.
@Pawncob
Please stop saying that an LLP is a partnership. It isn't. It's a body corporate. If it carries on a business, that business is taxed on the members as if they were partners in a partnership. Taxing an LLP like a partnership doesn't make it a partnership. But then again, what's to stop an ordinary partnership having a share capital if it chooses?
@Stephurhan
Limiting liability isn't the only purpose of shares. I accept that there's little point the members of a company limited by shares also providing a guarantee. However, companies limited by guarantee were once able to have a share capital, but the liability of the members was still limited by the guarantee. Many of these companies still exist, but you can't form new companies limited by guarantee and with a share capital. An unlimited company can also have a share capital.
You are correct that HMRC might also argue that an LLP can't have a share capital, but until they can show why it can't, they would have to accept the position if one actually did.
There are a number of reliefs that are conditional on one entity (the LLP) being a 51%, 75% or 90% subsidiary of another entity (the corporate member) that rely on the existence of an ordinary share capital to create that subsidiary relationship. And so I'm interested in challenging classic thinking.
Meet the Smodgeskin
For those that don't know, the Smodgeskin is a form of association that's concerned with providing television facilities in student digs. To achieve that, a certain amount of revenue expenditure is necessary; Sky subscription, replacing the satellite dish after it's been stolen by scrap metal thiefs (or insuring against such risks), replacing the coaxial cable after the rats have gnawed through it (or relevant insurance cover). This revenue expenditure is then financed by charging those that make of use of the television facilities for their use, and if viewing numbers are high enough surpluses will arise.
When the Smodgeskin is first established, there's also a certain amount of capital expenditure; the TVs, the Sky installation, etc. This capital expenditure is financed by the issue of sharesin the Smodgeskin. The more a person is willing to contribute, the more shares they get; the more shares they have, the more say they have over what gets watched and when, and the more they participate in both revenue surpluses and any surpluses that arise when the Smodeskin is dissolved.
Obviously, smarter shareholders in (or members of) the Smodgeskin buy as many shares as possible in order that they can ensure that the most popular programs are watched, in order to maximise viewing income, thus maximising surpluses, in which they will participate more than most. This also helps keep the resale (or market) value of their shares as high as possible.
So I thought, well if this can work for a Smodgeskin, why can't it work for an LLP. Different members may commit differing amounts of capital. If we issue them with shares to reflect the differing amounts of capital they have committed and let them have proportionally more participation rights and proportionally more votes, then people will want to contribute more. That way, they can have more of a say on how the LLP is run, so that the LLP will make greater profits in which they will have a greater participation share.
Then I thought to myself, well that walks and quacks like an ordinary share capital. Is an LLP allowed to have an ordinary share capital? After all, everybody always says, "an LLP doesn't have a share capital". But why doesn't an LLP have an ordinary share capital? is it because it prohibited from having one? or is it just because it isn't required to have one?
After all, if a Smodgeskin can have an ordinary share capital, why shouldn't an LLP be allowed to have one? Perhaps it's just because the world's flat.
Do report back
While I think your comparisons to Columbus are flawed (the physical shape of the world is a bit easier to prove than an, at best, grey legal area) you do seem determined to go ahead with the plan. Do report back on how you get on. I'd be especially interested in how you get on with your arguments in a court of law if it should come to that. Uphill struggles do ocassionally end up with reaching the summit, even when others don't rate your chances of achieving your goal.
@George atAsda
@George atAsda
I keep on saying this because that's what HMRC say.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM72115.htm
Specifically:Although in general law a LLP is regarded as a ‘body corporate’, for tax purposes a LLP is normally treated as a ‘partnership’.
Oh, if HMRC say so...
... it must be right. Although I think in the extract you quote, I do think the word normally should be replaced with the word broadly. Again though, the manner in which an entity is taxed has no bearing on what constraints apply to the way it is constituted.
@stephurhan at this stage this isn't an idea I'm pursuing, I simply find the concept interesting.
to quote George himself on another thread
I wonder though why you ask these questions, when you only take issue with any opinions offered. Are we all expected to revel in your brilliance?
Not answering the question
When the question posed is "why can't you do X", and people resond by saying "you can't do X", it seems perfectly reasonable to me to press them on "if you say that I can't do X, then exactly why can't I?" It's also seems perfectly reasonable to engage them in debate to achieve the purpose of getting a response to the question "why can't I?".
It's a thought that I had that I'm still unsure of the right answer to, although I have been able to address the underlying point, which makes the right answer irrelevant.
I think you need to befriend some barristers George
Or have exceedingly deep pockets.
@Chris
I came to the conclusion that everybody was going to tell me the same thing (whoever they are), which must mean that I'm right, since "the majority is always wrong" (Henrik Ibsen).
@Thisistibi. I think your assertion is invalid. A query has whatever merit that it brings to the OP, not those who choose to respond or not. Therefore, both must have equal merit.
Surely
A LLP with a share capital would be a LLC.
You can't issue shares in a partnership.