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LLP and corporate member profit share

LLP and corporate member profit share

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Can LLP Profit sharing ratio/Capital entitlement differ?

The scenario I am thinking of is as follows:

Legitimate husband and wife trading company (LTD 50:50 owned) becomes a member in a new LLP along with the husband and wife (so 3 members in total).

Profits are split, say, 90% to LTD and 5% each to H & W.

Capital entitlement 50:50 H & W only.

I am thinking this will channel income through to the LTD which can then distribute the LLP profits as dividends as and when it chooses and and asset disposals in the LLP (or of the LLP itself) will either attract Entrepreneurs relief and/or utilise the annual CGT exemption for H&W.

Any thoughts, comments, drawbacks?

Replies (7)

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Mark Lee 2017
By Mark Lee
14th Apr 2011 17:57

Yes - profit and capital sharing ratios can be different

Same as in conventional partnership. There is no requirement for capital and profit sharing ratios to be the same.

Best to evidence the arrnagements in a signed uptodate members agreement of course.

Whether the plan works is a different question ;-)

Mark

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By Dave Paveley
15th Apr 2011 11:14

Thanks Mark.

Your confirmation is very much appreciated.

Any thoughts as to why that set-up might not achieve it's tax purpose?

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By johnt27
15th Apr 2011 11:48

Agree with Mark

It appears you have the set up in the wrong order. In order to get the tax advantages you need the trade and assets of the company to be transferred to the LLP, which will trigger a capital gain. I'm not aware of any exemptions for transfer in this way (unlike the exemptions for unincorporated business to corporate structure). This means there is a tax cost which may outway any future benefits.

The arrangement also means that you forego any AIA, so if the trading business undertakes any significant investment in capital this will affect any tax savings as well.

One thing to note though is that the company will need to have a minimal capital sharing ratio (say 1%) in the LLP with husband and wife sharing the balance in order to satisfy HMRC.

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By Dave Paveley
15th Apr 2011 15:46

Thanks John - much appreciated

I think perhaps I did not explain the scenario fully.

 

The company (LTD) has it's own trade and is quite happy with it's trading set-up with no intention of shifting anything into the LLP.

The LLP (I believe) was formed partly as a separate trading entity and partly to use as an investment vehicle so that it could invest in new business start-ups.

I guess the logic being that if any of those start-ups 'went big' any gain could be reduced by annual CGT exemption and entrepreneurs relief.

Having inherited this client, the partnership agreement currently has 90% of profits going to the living members and 10% to the company. This appears to give the individual members a NIC and higher rate tax headache all for the possibility of a reduced CGT liability in the future.

I guess what I am asking is, by changing the profit sharing ratio to 90% to the company (but leaving the capital ratio in favour of the individuals), can they have their cake and eat it?!

i.e. diverting most of the income through the company but retaining, say, 90% of any future capital gain as individuals.

I can't see the logic in setting it up the way the previous accountants have done.

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By naomi2000
15th Apr 2011 17:28

LLP goodwill

Hi Dave,

If you have chargeable assets within the company you have a disposal on the transfer to the LLP because the company has a 100% capital share beforehand and a zero share afterwards.

I think your strategy only works if the current chargeable asset values are depressed so that there is almost no capital gain on the transfer to the LLP but that you believe that the assets will rise in value in future. Even then, you would have significant transaction costs and would need to make special provisions for one particular asset which is goodwill.

Hope this helps,

 

 

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By johnt27
15th Apr 2011 22:24

Now I understand!

Dave set up seems fine. I'm not sure if the profit sharing arrangements are written into the LLP agreement, if they are I would look to make profit sharing a decision decided at a members meeting rather than fixed %'s.

That way as you said you can have your cake and eat it as you can play with the individual partners personal allowances etc to maximise tax/ni savings by diverting any "unwanted profits" to the company. If you have alphabet shares in the company you can also play with divis too.

What fun :)

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By Dave Paveley
18th Apr 2011 08:44

Thanks all..

Naomi: A little confused by your response. There is no transfer from the company to the LLP (except maybe some start-up cash loaned). Two separate trades. Have I missed something?

 

John: Thanks for the reassurance. I don't want to be going down the alphabet shares route just yet. This set-up is complicated enough!

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