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Partners incorporating individually

Partners incorporating individually

The members of an LLP are thinking of incorporating fully, but not as one limited company. Instead, each will transfer his share of the business to his own personal company, leaving a partnership comprising entirely of corporate partners - a 'CT partnership'.

They will not claim any deferral in respect of the disposal of their shares of the business and will pay the 10% CGT, thereby generating a loan account. That's the idea, anyway.

On the face of it, the figures look pretty good for a business at this level of profit, as each corporate partner draws a modest dividend to use up the basic rate band and draws the rest of his income needs as a loan repayment. Even after the loan accounts are gone, there is still a modest tax saving to be had year on year.

The use of corporate patners creates a number of (hopefully!) unconnected companies, all of which are small for corporation tax purposes - incorporation of the whole business would create a company liable for the full rate of CT.

I am aware that this structure will reduce flexibility as far as a future sale of the business to a third party is concerned. Other than that, is anyone aware of any restrictions or pitfalls to the proposed structure?

Many thanks in advance for any comments.


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15th Mar 2011 20:40

Sorry, but I don't think this works

If you incorporate the partners, rather than the LLP, the goodwill stays where it is - in the LLP - it was a partnership asset before, and it's a partnership asset afterwards.  You can't subdivide it and sell it off piecemeal; because if you can it's not goodwill and there's a particular piece of anti-avoidance legislation that will tax it as income of the incorporated partners.  The only thing that's changed is that the partners who were previously individuals are now companies.

Other than that, it sounds like a great idea.

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16th Mar 2011 10:58


IR35 could be an issue.


Having a slow moment - why would they not be connected for CT purposes?

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16th Mar 2011 11:47

Ownership of goodwill

I have seen Cirius di Lemma's point made elsewhere but I struggle to follow the logic. Why can't the ownership of goodwill be split from the trade itself in the same way as, say, ownership of tangible assets such as the building or equipment be owned separately from the person running a business?

If it is accepted that goodwill can only be a partnership asset then surely each partner has an equitable interest in it. After all, if the goodwill was sold to a third party, the individual partners would receive their share of the proceeds. Equally if a new partner is admitted the partnership deed may require that he make a payment for a share in the goodwill to the other partners. Surely the admission of corporate partners is no different in principle from admitting individual partners with the partners being required to buy into the goodwill? The position may be more difficult if the partnership deed does not require payment to be made on admission of a new partner.

On the IR35 issue I believe the view is that the companies are not providing the services of their respective owners to the partnership but that the individuals are acting as representatives of their respective companies.

On the associated company point, remember that it is the companies that are in partnership, not the individuals any longer. On what basis are the individual owners connected with each other?

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16th Mar 2011 12:11


There's not an IR35 or associated companies issue.

Ultimately there's not really such a single thing as goodwill; it's an accounting notion that represents the excess that a business is worth as a whole going concern over the sum of the values of its separable parts.  Its actually a basket of things that will vary from individual business to individual business.

To the extent though that it is a thing separable from the business itself and capable of being sold/transferred separately to the individual partners, then it's clearly something other than goodwill; it's their individual rights to the income from that business, potentially attracting a charge under S.776 ITA 2007.

Your second paragraph is the proper view that each partner has an equitable right over all of the assets of the partnership.  Any contribution made on entry is not a purchase of goodwill per se, but a capital contribution to the partnership, to be properly shown as capital account in the partnership and an investment (not an intangible asset, attracting relief under the Corporate Intangibles regime) in the accounts of a corporate partner.

It is acknowledged that where a capital contribution is made on entry to the partnership there are, for capital gains tax purposes, corresponding acquisitions and dispoals of the partnership's chargeable assets between the partners, but I do think that's a different issue from what the OP is proposing.

I'm still of the view that the OP's proposal does not have the effects that he thinks it does and desires.

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