Navigating the shift: why accounting firms choose an LLP over Ltd structures

Traditionally, accountancy practices had been operating via a sole trader or a general partnership structure. Since the introduction of the Limited Liability Partnership (LLP) in 2001, many practices adopted this and nowadays, it is not uncommon to see them operate via one of the above structures, or a Limited Company (Ltd).    

Why transition from a Ltd to an LLP Structure?

Whilst it seems common for practices to incorporate into either a Ltd or an LLP structure, or indeed for an LLP to convert to Ltd, it is not as common in recent times for a Ltd to switch to an LLP. Each firm will need to weigh up the benefits of each structure before deciding which resonates with their business model the best. All appear viable in the accountancy sector. 

Benefits of an LLP Structure

It is useful to remind ourselves of the benefits of an LLP structure, particularly over a Ltd. Firstly, whilst members of an LLP will pay Income Tax and National Insurance Contributions on their profit allocation, profits in a Ltd can only be distributed to shareholders as dividends after the deduction of Corporation Tax. With Corporation Tax rates now as high as 25% and the dividend tax rates almost in line with the higher and highest rates of income tax, the tax savings offered by a Ltd are not as generous as they once were, and in some instances, may be higher. Of course, LLPs are tax transparent, and all profits are subject to Income tax as they are recognised. A Ltd offers the opportunity for post Corporation Tax profits to be retained in the business as working capital. 

Members of an LLP also tend to be client-facing, whereas investing shareholders in a Ltd may not be, giving rise to potential conflicting interests. This is especially common in cases where a private equity firm has acquired a practice. Client service is paramount in accountancy, and there can be no room for leakage in conflict of interests. 

LLP Members contribute capital into the business and share responsibilities with their fellow partners. The risk is distributed amongst the partners which then provides a sense of security and camaraderie, particularly during times of uncertainty. In contrast, within a Ltd, unless the shareholders are involved in the day to day running of the business, the above skills will need to be sought amongst the appointed directors.

Members will bring their own set of unique skills and networks to the table which the partnership can benefit from, thereby enhancing the capabilities and offering of the business. Again, the directors in a Ltd may only benefit from the shareholders to the extent they participate at an operational level. Furthermore, directors in a Ltd are ultimately employees, whereas members in an LLP are business owners. Consequently, the mindset of the two can be very different in day-to-day operations but more importantly, in longer term objectives and vision for the business.

In an LLP, the decision makers are the members, being the owners and the operators of the business. However, in a Ltd setup, both the directors and shareholders will need to agree, which can slow down the business’ ability to respond to changes in conditions or avail itself to new opportunities. 

Practical Considerations 

When transitioning an accountancy firm from Ltd to LLP, several crucial steps must be taken into consideration. The Ltd entity must first undergo dissolution, a process initiated through a general meeting where shareholders vote on a special resolution, requiring a 75% agreement. Subsequently, an LLP must be formally incorporated at Companies House. This involves appointing at least two members as designated partners, tasked with overseeing compliance matters. Notably, the LLP can retain the same name as the previous Ltd entity, ensuring continuity in branding and recognition.

Following incorporation, both the LLP itself and its members must register with HMRC for tax purposes. It’s imperative for members to comprehend the taxation implications associated with the LLP structure.

Once incorporated, drafting an LLP agreement is essential. This document delineates the operation of the LLP, including provisions for profit sharing, capital contributions, and procedures for leavers and joiners. This process can incur costs depending on the practice’s size and complexity.

Transferring contracts from the Ltd to the newly formed LLP is another critical aspect of the transition process. While most contracts will need to be transferred, certain employee contracts may benefit from Transfer of Undertakings (Protection of Employment) regulations (TUPE), potentially exempting them from transfer.

It’s crucial to note that no tax reliefs are typically available for the business transfer, necessitating adherence to standard rules. Additionally, upon ceasing the Ltd’s trade, any carried forward losses may be forfeited.

Finally, depending on the specific circumstances, there may be Capital Gains Tax liabilities triggered by the sale of the original business assets. A thorough understanding of tax implications is therefore essential throughout the transition process. 

There are pros and cons for accountancy firms looking to become an LLP, but given the nature of our industry, the benefits of becoming an LLP can far outweigh the challenges. However as always, advice should be sought to consider the implications relevant to your practice to determine the best option for you.