Legal

LLP Or LTD: What's The Best Option For Wealth Managers?

Kiran Chotai 13 May 2024

LLP Or LTD: What's The Best Option For Wealth Managers?

The author of this article at a prominent accountancy firm considers the case for and against different legal structures for holding a business.

The following article explores whether those trying to set up a wealth management business should set up a limited (Ltd) company or limited liability partnership (LLP). There are tax implications, for example. The author, Kiran Chotai (pictured), senior manager at law firm Haysmacintyre, runs through the details. 

The editors are pleased to share these insights; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com


When establishing a wealth management firm, founders may consider whether to structure the business as an LLP or Ltd. While there are benefits and considerations for each, which will of course vary for individual firms, there is still a case for opting for the LLP structure, despite several benefits no longer being available.  

What are the advantages of an LLP?
The primary benefit of using an LLP within, say, an asset management firm, would be the potential tax savings afforded. The tax savings in a Ltd are no longer as extensive as they once were – this is due to the rise in corporation tax to 25 per cent, and the positioning of the dividend tax rates almost on par with the higher and highest rates of income tax. 

While it remains the case that a Ltd structure allows post-corporation tax profits to be kept in the practice as working capital, in many ways the tax advantages of an LLP outweigh this benefit. This is despite the fact that LLPs are tax transparent and all profits are subject to income tax as they are recognised. For instance, whilst those involved in an LLP will pay income tax and National Insurance Contributions (NICs) on their profit allocation, profits in a Ltd are restricted to distribution among shareholders as dividends after the deduction of corporation tax.

One should not forget that remunerating highly paid employees in a Ltd will incur employer’s NICs of 13.8 per cent. In a LLP structure, these employees can be established as members offering an immediate tax saving.

It can often be the case that losses are made in the earlier years. In a Ltd, PAYE and NICs would be payable on salaries despite its making a loss. In an LLP however, members are taxed on their share of the profit allocation, and not the draws distributed to them. At worst case, the allocation in a loss making LLP would be nil. Over time, as the business picks up, the allocated profits will be taxable on the members. If there are no profits, then the draws taken by the member will not be taxable, offering a significant tax saving.  

Incorporating as an LLP can create several other opportunities for wealth management firms. For instance, those involved in LLPs are typically more client-oriented, when compared with investing shareholders in a Ltd. This sidesteps a potential cause of conflicts of interest – a particular risk when a private equity firm acquires a Ltd practice – which is a key point in favour of LLPs.

Greater than the sum
Another benefit to consider is how a partnership can become more than the sum of its parts – each member can offer their own individual talents and contacts, enriching the overall quality and scope of the practice. Indeed, an LLP structure can encourage more engagement with the businesses from its members, who are ultimately its owners, operators, and decision-makers – compared with directors in a Ltd who are more akin to employees. This can not only improve the mindset of members on a day-to-day basis, but boost their commitment to long-term planning and goals. 

Further to this, there is the sense of partnership that derives from risk in LLPs being shared across the partners, who each contribute capital into the firm and take responsibility for its performance. They are a team, and this can be an important mentality to have if trickier times arise. From an efficiency perspective, too, in a Ltd the directors and shareholders of a firm need to agree on decisions – whereas the remit of an LLP’s members allows the firm to stay agile and react quickly to new developments or opportunities.

An LLP is also able to admit new members to the partnership more easily than a Ltd can appoint new shareholders. This makes promoting employees simpler. Furthermore, members in an LLP can vary their profit sharing arrangements annually reflecting performance or contribution. In a Ltd, payment of a bonus would be subject to PAYE and NIC, and payment of a dividend would have to be to all shareholders of that class, so is not as efficient.

How can firms convert to an LLP?
There are several important steps when changing a wealth management firm from a Ltd into an LLP. In the first instance, the Ltd entity must undergo a dissolution, following a 75 per cent vote by shareholders at a general meeting on a special resolution. After this, the LLP can be officially incorporated at UK Companies House – during which at least two members will be appointed as partners and made responsible for all compliance matters.

It is also useful to note that an LLP can continue operating under the same name as the Ltd entity – allowing a seamless transition for the brand.

What happens next?
The LLP and its members must then register with HMRC for tax purposes – it is crucial that members heed the taxation implications of becoming an LLP. For instance, there are typically no reliefs available in a business transfer, so it is crucial to abide by standard rules. In some circumstances, the sale of the original business assets may also trigger capital gains tax liabilities. Finally, when ceasing the Ltd's trade, any carried forward losses may be forfeited.

In terms of contracts, most will need to be transferred from the Ltd to the new LLP. However, certain employee contracts may be exempt under the Transfer of Undertakings (Protection of Employment) regulations (TUPE).

Another important point of action is to draft an LLP agreement. This details the operation of the firm, such as outlining terms for capital contributions, profit sharing, and procedures for leavers and joiners. This step can incur a fee depending on the size and structure of the practice.

Transitioning to an LLP is not a process to be undertaken lightly. But the structure can bring many advantages for wealth management firms, which for many can supersede any practical concerns. If well-informed advice on the process is followed carefully, firms might very well find they are better off becoming an LLP.

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