Limited company or partnership: which is best?

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Inspired by yet another posting on the subject of incorporation. AccountingWEB decided to comission a guide to help you with this challenging and common issue. Nick Antoniou of Smith & Williamson highlights the pros and cons.

The choice of legal status for your business is a complex one and is dependant on a number of tax, commercial and legal considerations, which impact on the business for many years to come. Getting it wrong can have many negative consequences, which are not simply costly in terms of tax, but many practical difficulties concerning future succession and sale of the business. Take time to consider the pros and cons of each option as the time invested at the business planning stage will be of benefit in the future.

Should you operate as a limited company or partnership? Or perhaps go for limited liability partnership (LLP) status, which some believe offers the best of both worlds? It is essential to select the appropriate status for your business, as this will determine a number of other issues including tax, future succession of the business and many other factors.

Whilst it is frequently assumed that incorporation brings substantial tax benefits and greater financial protection to directors, this is not always the case. In fact, for some businesses, running as a partnership can be the most efficient and rewarding route.

Each firm must assess its particular ambitions in view of current circumstances and decide the most appropriate route. Indeed, selecting the best operating vehicle for your organisation is just one part of business planning, but first, let's recap on some basic differences between limited companies and partnerships.

A limited company is a legal entity, run by directors and owned by shareholders, who are frequently the same people. Each company must publish its annual accounts, although small organisations need only provide a basic financial summary and for those with turnover under £5.6 million per annum, no audit is required.

In contrast, partnerships are owned and run by individual partners who are personally and jointly responsible for the actions of their fellow partners which partly accounts for the importance of a partnership agreement or deed. Partnerships do not have to publish or audit their accounts, however large they get, although there is a move towards increased transparency.

A few of my clients have set up a limited liability company to run alongside the partnership to which different types of projects are directed. This affords maximum flexibility and helps the business to protect itself. It can also be a useful means to ensure succession as partners leaving a partnership can result in dissolution whereas a company continues, even when directors retire or leave.

Limited liability partnership, which became available from 6 April 2001, brings the benefits of limited liability whilst maintaining a traditional partnership. Not surprisingly, an increasing number of businesses of all sizes are considering this.

As the members have limited liability, the protection of those dealing with an LLP requires that the LLP maintains accounting records, prepares and delivers audited annual accounts to the registrar of companies, and submits an annual return in a similar manner to companies. The exemptions (and limits) available to companies with respect to delivering abbreviated accounts and exemption from audit also apply to LLPs.

Do you need to limit liability?
The type of work you undertake or your client portfolio often dictates whether or not limited liability is required. Typically, if you have regular overseas projects or work for quite large clients...

Register for free with AccountingWEB and log in to read the full article which also covers:

  • How much do you want to take out of the business?
  • Who should own the business?
  • Costs of incorporation
  • Summary

Nick Antoniou, director at Smith & Williamson, the accountancy and financial advisory group. Tel 0208 492 8600, [email protected]

Note

Smith & Williamson is an independent professional and financial services group employing over 1,100 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-size corporates. It operates from offices in London, Belfast, Bristol, Guildford, Salisbury, Southampton, Tunbridge Wells and Worcester. Nexia Audit Limited is an independent company which works alongside Smith & Williamson to complement its specialist financial advisory services.

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By Taxi
26th Nov 2005 00:07

Goodwill - no tax relief on goodwill purchased from a
connected person.

Sole traders v. Ltd Cos, I find that a Ltd co is the safer bet (providing the client recognises that a company is a separate legal entity). One pays less tax, and once you have set up correctly, it is easier to manage.

A further major advantage is in respect of investigations. As a director of a limited company, you will only suffer an investigation into your personal tax return. The full "books and records" inspection is suffered by your company, and provided that you have not used your company as a personal bank account, this makes the whole process cleaner and easier.
OK, so there are PAYE issues, again it is just a matter of good housekeeping.

As to LLP's, well I understand when traditional partnership want them - GPs, Architects etc, but again, I think many of them would be more suited to a Ltd Company.
Finally, LLPs are soon going to be accounted for like companies. Terribly confusing for clients, who I think find the whole LLP thing rather cumbersome.
Most accountants, I wager, would really rather stick to the tried and trusted Ltd Co. vehicle.

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23rd Nov 2005 10:44

Re message from Alistair Kennedy
Can companies write off purchased goodwill when it is transferred from a sole-trader or partnership?! It is still purchased by a ltd co but no tax relief is available as far as i am aware

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22nd Nov 2005 17:44

Capital issues - Ltd v partnership
The article is v. light on technical content. The argument for lower taxes in Ltd co provided income is taken as dividend & not salary is well rehearsed. What is not mentioned is the loss of 100% BPR where individuals retain a property that is used in a ltd co. Also ltd cos can write off purchased goodwill which partnerships cannot.

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22nd Nov 2005 15:40

missing the point??
Surely the main reason many have gone down the incorporation route has been to reduce their tax liabilities.

In the example quoted, a limited company could make a profit of £77,988 (i.e. 22% less than the partnership) and the directors/shareholders still take home £65,030 if salaries are paid to the (two) directors of £4,895 with the rest of the profit taken as dividends - total tax liability £12,958!

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22nd Nov 2005 14:33

Company v. Partnership the only choice?
Presumably this well-presented comparison of companies versus partnerships was written for the non-technical browser. If so, doesn't the absence of mention of the sole trader option mislead?

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22nd Nov 2005 16:58

Incorporation fee?
Since when has there been a £250 fee to incorporate a company? Does Nick Antoniou actually mean that his own firm charges this for a formation?

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23rd Nov 2005 09:37

Limited Liability
As a matter of course, these days, I advise all my clients to go Ltd.
With compliance set to increase, HMRC wanting all self-employed on the payroll plus all the normall trade risks there really can be no other option.
I have been in the profession for forty years and up untill a few years ago I would have looked at all the options so I haven't taken this decision lightly. I have not seen or heard of one arguement that persuades me otherwise and I have a very open mind.

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