October 29th, 2012 / Insight posted in

Should I set up a company or LLP?

DE writes: I am considering how to structure a new business and am drawn by the tax treatment and flexibility of a limited liability partnership. Are LLPs accepted and understood in the business world? Do credit-rating agencies and banks treat LLPs in the same way as companies or is it harder to get trade credit? Also, I intend to grow the business and sell it in six to eight years. Is it harder to sell an LLP than a company?

It is true that LLPs are relative newcomers to the corporate world, writes Matthew Meadows, corporate finance partner at Kingston Smith LLP. However, they are becoming more widely understood as they are adopted by a growing number of professional services firms and “people” businesses. LLPs can provide a tax-effective way of incentivising and remunerating key employees within a corporate framework. 

In theory, there should be little difference in the way credit agencies treat LLPs, but there are cases where balance sheets have been misinterpreted because members’ capital is disclosed on the balance sheet whereas for a limited company, shareholders’ funds are disclosed. This can result in a lower credit rating. Credit-rating agencies are aware of this issue. 

An LLP should not be any harder to sell. There could be some complications with the personal tax liabilities of the members and the extraction of non-business assets. Usually these are not a barrier to a buyer. The partnership agreement should be worded with a sale in mind to prevent complications.

On a positive note, goodwill arising on the acquisition of the trade and assets of an LLP can be tax deductible and so may be attractive to a purchaser.