Category: companies

Which is better an LLP or Limited Company?

photo of people near wooden table

As an accountant, I am often asked by my clients what the differences are between an LLP and a Limited company. While both provide limited liability protection, there are some distinct differences between the two.

An LLP is a type of partnership structure that offers limited liability to its partners, which means that their personal assets are not at risk if the business runs into financial difficulties or is sued. An LLP is similar to a general partnership, but unlike general partnerships, the partners are not personally liable for the company’s debts.

A Limited Company is a separate legal entity with its own legal personality, and its owners are known as shareholders. A limited company offers limited liability for its shareholders, which means their liability is restricted to the amount they’ve invested in the company.

Differences and Things to Consider

  • an LLP is typically set up by professionals such as lawyers, accountants, or doctors who wish to operate as a partnership. Limited company can be set up by anyone, including sole traders who wish to take their business to the next level.
  • Property Investors sometimes use a Partnership or LLP as stepping stone to incorporation which benefits from special SDLT treatment.
  • Buy to Let investors prefer Companies as they can then recover all of the mortgage interest. This isn’t possible for individuals or partnerships as interest is removed and replace with the finance allowance. This can have a big impact for higher rate tax payers.
  • Holiday Let owners may prefer LLP’s especially if there are large Capital Allowances to be claimed
  • an LLP is taxed as a partnership, with profits being distributed amongst the partners and taxed at their individual tax rates.
  • In contrast, a Limited company is taxed separately from its owners, and profits are subject to corporation tax rates. This can make an LLP more tax-efficient for its partners. For long term investment and building up assets a company can be more tax efficient because Corporation Tax rates are lower than income tax rates.
  • With a company its easier to control when income is taken by the owners which could result in tax savings, partnership profits are immediately tax on the partners
  • an LLP does not have shares or shareholders, but rather partners who own a percentage of the business.

Funding Differences

One significant difference between LLPs and Limited Companies is that LLPs are relatively easier to set up and require lower capital outlay and less stringent regulatory requirements. The flip side of this is that limited liability protection may not be as comprehensive as it is with Limited Companies.

If you plan to raise funds for your business, Limited Companies have an advantage as investors are more likely to invest in these structures.

Changes in Ownership

Changes in ownership are more straightforward in a Limited company due to the ability to issue and transfer shares. In an LLP, changes in ownership can be cumbersome due to the need to re-do the partnership agreement and potentially consult with partners.

Overall, the decision between setting up an LLP or a Limited company depends on the specific needs of your business.

steve@bicknells.net

Directors Loan ISA (Innovative Finance ISA)

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Individual Savings Accounts (ISA’s) are tax-efficient savings and investment accounts that allow individuals to earn interest or returns without paying income tax or capital gains tax on their earnings. There are several types of ISA’s available to investors, and each has its own limits and rules.

Cash ISA

Cash ISA’s let you save up to £20,000 a year tax-free, and the interest that’s earned is also tax-free. The average returns for cash ISA’s are typically low, as they are considered low-risk investments.

Stocks and Shares ISA

Stocks and Shares ISA’s allow investors to invest in stocks, shares, and various other investment products. They also have a £20,000 limit, but their performance is subject to market risks.

Innovative Finance ISA

Innovative Finance ISA’s (IFISA) are a relatively new type of ISA that allow investors to lend money to borrowers through peer-to-peer lending platforms. The returns on IFISA’s can be high, but they come with greater risk.

Directors Loan ISA and IFISA

One type of IFISA is the Director’s Loan ISA, which is available exclusively from rebuildingsociety.com. This platform enables investors to lend money to businesses while also enjoying tax-free returns.

The IFISA works by enabling investors to lend money to borrowers through peer-to-peer lending platforms, such as rebuildingsociety.com. These platforms then invest the money into various businesses or properties.

The IFISA is regulated by the Financial Conduct Authority (FCA), and many platforms are also members of the Peer-to-Peer Finance Association (P2PFA).

It is important to note that investing in IFISA’s can come with greater risks and it is not suitable for all investors. It is crucial to seek professional advice before investing.

The benefits of IFISA’s include tax-free returns and the ability to invest in businesses or properties that may provide higher returns than traditional investments.

However, investors should consider the risks aspect of investing, such as the possibility of losing their capital, the lack of liquidity, and the reliability of the companies or borrowers they lend their money to.

In conclusion, IFISA’s are an innovative way to invest and save tax-free earnings. Individuals should undertake thorough research and seek professional advice before investing to make an informed decision.

steve@bicknells.net

Sole Directors – time to change your model articles – Hashmi v Lorimer-Wing 2022

UK Companies are normally formed using model articles, they are contained in the Companies Act 2006 and replaced the previous Table A articles.

Model Articles were designed a ‘one size fits all’ solution and until now pretty much everyone including sole director companies have adopted them. The recent high court judgement has changed that!

In the model articles section 11(2) states

The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

Model articles for private companies limited by shares – GOV.UK (www.gov.uk)

The case of Hashmi v Lorimer-Wing 2022 was the result of a dispute between directors, leaving the company with one director. The High Court Judge decided in the case that Model Articles are not suitable for single director companies.

What should sole director companies do now?

Appoint another Director

It sounds obvious but might not work for everyone, the company probably has a sole director for a good reason so appointing another director isn’t probably a good idea?

Change the Articles

Assuming you don’t appoint another director, then you have to do this. Following the High Court decision hundreds of thousands of companies will now be doing this. But it won’t fix decisions already taken by a sole director!

How do you deal with decisions already taken by a Sole Director?

You will need a written shareholders resolution to ratify decisions taken by you as a sole director.

You have 15 days from signing the resolution to file at companies house!

So don’t panic, if you have model articles and you are a sole director, a resolution and new articles will fix the situation.

steve@bicknells.net