QUESTION: Ive been running a small business with my brother for several years and we have always been concerned that we have unlimited liability should anything ever go wrong. We extract most of the profits of the business each year so our accountant has advised us against incorporating, even though we are keen to have the security of limited liability. Is there anything else we can do to limit our personal liability? Im very worried that there might be a claim made against the business some day and if this happened we could be at risk of losing personal assets, such as our family homes.
ANSWER: Perhaps you should give some consideration to converting your existing partnership into a Limited Liability Partnership (LLP).
The key advantage of an LLP compared with a traditional partnership is that the members of the LLP are able to limit their personal liability if something goes wrong with the business, in much the same way as shareholders in a company have always been able to do. Of course anyone lending money to the LLP such as a bank may still require personal guarantees from the members, as they frequently do with directors and shareholders in a company.
Where business owners have wanted to limit their personal liability in the past, they have normally set up companies and any profits made by those companies are subject to corporation tax. Dividends paid by the companies can then be taken as income of the shareholders. LLPs are taxed quite differently in that the profits are treated as the personal income of the members, as if they had run their business as a partnership. The taxation of companies and partnerships is very different but taxation should not be the main consideration in choosing a business vehicle.
LLPs must produce and publish financial accounts with a similar level of detail to a similar sized limited company and must submit accounts and an annual return to the Registrar of Companies each year. This publication requirement is far more demanding than the position for normal partnerships and specific accounting rules may lead to different profits from those of a normal partnership
An LLP is set up by a legal incorporation process which involves sending certain documents and a fee to the Registrar of Companies. Although it is not legally necessary, every LLP should have a thorough and comprehensive members agreement in place and needs to have taken legal or professional advice about the issues that should be covered by this agreement.
Existing partnerships can convert to a LLP by exactly the same process of incorporation and providing there are no changes in membership or in the way in which the partnership operates, there may well be no impact on the partnerships tax position. Again care and advice needs to be taken before any decisions are made.
Increasing numbers of LLPs are being created, however, any decision to convert an existing partnership or to set up a new business using a LLP is a complex one, involving legal, accounting and tax issues and professional advice is recommended.
:: Paddy Harty (p.harty@ pkffpm.com) is director at PKF-FPM Accountants (www. pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
