Although limited liability companies and limited liability partnerships (LLPs) share similar account reporting requirements and other characteristics, they operate differently in terms of taxation and internal structuring.
If you want to convert your company into an LLP, you must dissolve your existing company and register the business as an LLP. Unfortunately, simply changing to an LLP structure is not possible.
You need to consider several legal issues when converting your company to an LLP. In this article, we answer some of the most frequently asked questions we’ve received on the subject.
What is a limited liability partnership (LLP)?
The Limited Liability Partnership Act (LLP Act.) 2000 provides for the establishment of LLPs in England, Wales, and Scotland. Often described as a halfway house between a traditional partnership and a limited liability company, an LLP limits the liability of each partner whilst providing the flexibility of a partnership.
What is the procedure for the conversion of a company into an LLP?
To convert a company into an LLP, the company must be dissolved. This can only be accomplished if there is a general meeting and the shareholders of the company pass a special resolution, meaning 75% agree with the proposal to change the legal structure.
If the special resolution is passed, you must complete a transfer agreement that officially moves the company’s assets and liabilities to the newly created LLP.
You need to transfer all the company's contracts to the new LLP because the company has been dissolved and the LLP is a new business. Some contracts, for example, employment contracts, cannot be assigned as they are personal.
However, your employees may be protected by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). This means they will automatically be transferred to the new LLP under their existing contractual terms and conditions.
How do I set up an LLP?
To establish an LLP, you will need to:
- Choose a business name
- Have a registered address (this will be publicly available)
- Have at least two ‘designated members’
- Have an LLP Agreement that says how the LLP will be run
- Register the LLP with Companies House
You can use your company name for the LLP, provided the company has been completely dissolved.
A designated member performs similar duties to a company secretary, and their name will appear on the registration documents.
To register your LLP at Companies House, please contact us; we can take care of everything for you.
What are the conditions for the conversion of a Private Limited Company into an LLP?
As mentioned above, you need to obtain a special resolution from the company's shareholders to convert a limited company to an LLP.
Certain tax payments and conditions may apply to changing from a company to an LLP. No tax reliefs are available when transferring a business from a company to an LLP, so the usual rules must be observed.
Because the company must be dissolved, the trade will cease, meaning that any non-used losses cannot be carried forward.
Capital Gain on conversion of private limited company into LLP
When converting a private limited company into a Limited Liability Partnership (LLP), it’s essential to consider the potential tax implications. One of the possible taxes that may be triggered is Capital Gains Tax.
This tax is imposed on the profit or gain made from selling or selling a capital asset, such as a business. In the case of converting a company to an LLP, the conversion itself may be considered disposal of the business, which could result in a capital gain that is subject to capital gains tax.
It is essential to consult with a tax advisor to understand the tax implications of converting a company to an LLP.
Do I need a Partnership Agreement?
All LLPs must have a Partnership Agreement (or LLP Agreement). Because you will have dissolved your company, it may be possible to use parts of its Articles of Association in the new LLP Agreement.
A LLP Agreement will govern matters such as:
- Who the designated partners are, and the capital each brought to the partnership.
- The duties and responsibilities of each partner
- What happens if a partner retires or dies
- Removal of a partner
- How will profits be shared
- How disputes will be dissolved
The LLP Agreement is the foundation document of your new LLP; therefore, it is well worth investing in having an one of our experienced Commercial Law Solicitor draft it for you. You can also use our free LLP Agreement template, to get started.
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