Tax Planning for Partnerships – Comparison of Structures Mark Briegal, Partner

1. Tax Planning for Partnerships – Comparison of Structures Mark Briegal, Partner Aaron & Partners LLP

2. Agenda LLP? Company? Partnership? • The options • Pros and Cons • Key features and comparisons • Tax • Corporate and Hybrids • Own use and clients’ use

3. The Options • Sole trader • General partnership (GP) • Limited Partnership (LP) • Limited Liability Partnership (LLP) • Limited Company (Ltd)

4. General Partnership - Overview Partnership Act 1890 Not a separate legal person No formal formation or incorporation Relationship between the parties Default rules, but partnership deeds important and common Tax transparent Self assessment – No accounts

5. Limited Partnerships - Overview Limited Partnership Act 1907 Formal registration Limited liability for some; but must have one general partner Limited partners must not participate in management Tax transparent Self assessment – No accounts

6. LLP - Overview LLP Limited Liability Act 2000 Limited liability Incorporation and registration Disclosures Tax transparent No capital maintenance Self assessment Audit

7. Companies - Overview Companies Act 2006 Incorporation and registration Shareholders Employees and officers Corporation tax Profit extraction Some tax reliefs Incentive plans

8. Limited Company - Pros & Cons Advantages Risk management Recognised vehicle for M&A activity Relatively low set up and operational costs Potential goodwill extraction Retained profits taxed at corporate rates Better structure for ABS & share incentives Disadvantages Inflexible succession planning / ERS Benefits in Kind regime – particularly cars Very expensive: NIC costs PAYE NIC Cash flow

9. Incorporation A corporate entity – the future traditional model? Limited liability Mixture of external, internal and bank funding Profits belong to company – reflected in share value Lower tax rates on retained profits Separation of ownership, management and employment Goodwill recognised Public disclosure

10. Full partners – “equity partners” Limited partners Fixed share partners Fixed share equity partners Corporate partners Sleeping partners Salaried partners Shadow partners Non resident partners Trusts Companies Categories of Partner

11. Designated Members Equity Members Non-equity Members Fixed Share Members Restricted Members What happens to Salaried Partners? What happens to Associates? Can you have directors? Promotion and demotion? Categories of Members

12. Things to Consider • Tax position • (losses/other income) • Family position • The employees • Key talent • Incentive plans • Retention strategies • The future • Growth, succession and/or exit strategy ? The business Is it trading or investment? Assets held Risk Profit retention The owners Residence Domicile status Management

13. Comparing the options

14. Comparing the options 2 Sole Trader GP LP Ltd LLP Entity owns assets and owes liabilities in own right N N N Y Y Distinction made between ownership and management N N Y Y N Able to have tax efficient incentives N N N Y N Ability to give floating charge over assets N N N Y Y Transferable shares N N N Y N Restrictions on repayment of capital N N N Y N Income tax charged on retained profits Y Y Y N Y

15. Tax Drivers Highest rate of income tax Employers National Insurance Corporation tax (small companies/full rate) Capital gains tax 2012/13 50% 13.8% 20/24% 10/18/28% 2013/14 45% 13.8% 20/23% 10/18/28%

16. Tax Drivers

17. Some Partnership Tax Issues • LLP trading losses: • Belong to the member rather than the LLP • No loss relief available to the LLP – the member will claim appropriate tax relief in their tax return • Capital gains for members can arise: • Disposal to third party • Distribution of assets to a member • Changing profit shares and adjustments posted through accounts • Changing profit shares and payments made between members

18. Corporate & Hybrids - Professions Professionals face commercial challenges: Need to generate capital internally Attracting external investment How to provide for employee participation through tax effective remuneration Building capital value Retention and incentivisation of new or existing partners

19. Hybrid Structures – Established Businesses LLPs - hybrids Partnerships/LLPs - corporate partners Company - LLP subsidiaries Company - LLP hive downs VC/PE partnership and real estate partnerships and funds Company - incorporation and dis-incorporation

20. Hybrids - Service Companies Used as a vehicle to provide professional and support staff Possibly practice services - e.g. HR, marketing etc May be commercial advantages of operating a service company as part of a growth or acquisition strategy Service company re-charges at cost or small margin Adjust taxable profits under transfer pricing rules

21. Corporate & Hybrids Introduction of a corporate member Corporate has a share of LLP profits Retains working capital at lower tax rate After tax cash can be contributed to the LLP Possibly recycle members’ capital Flexibility for rewarding members Incentivise employees through share ownership

22. LLP Structures Holding Company Member A Member B A B C Member C Limited Company LLP Subsid A Subsid B LLP Sub A LLP Sub B

23. LLP Structures Outside Investor A B C Holding Company Member A Member B Member C Limited Company LLP Subsid A Subsid B LLP Sub A LLP Sub B

24. Hybrids – Private Equity Principals UK Advisor LLP Fee General Partner Company Services General Partnership Limited Partnership LLP Fund Vehicle Limited Partnership Principals Portfolio Investments

25. How to remove? • Directors are employees with full employment rights • Partners and members are self-employed with only discrimination rights • Good employment contracts • Good partnership and members’ agreements • De-equitisation • Expulsion

26. Summary • Pros and cons to all structures • What is important? • Flexibility • Incentivisation • Privacy • Tax implications • Hybrids can give some benefits of all options

27. mark.briegal@aaronandpartners.com 01244 405563 Thank You!