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Thursday, June 30, 2022

Company vs LLP: which structure is better?

Claire Watkins is Partner and Head of Buzzacott’s Professional Practices Group, which looks after small and medium-size firms in the architectural, legal, property and consultancy sectors. She has particular expertise in business start-ups, restructuring from partnership to LLP or Limited Company, tax planning, RIBA regulatory matters and financial forecasting.

Here, Claire explores whether company or LLP structures are more beneficial to architectural practices.

Over the past few years, we have seen a steady increase in the number of architecture practices choosing to operate from a company structure rather than an LLP or traditional partnership. So what are the main drivers for change and is a company structure better?

Lower tax rates

A company is taxed at corporation tax rates, the lowest rate currently being 19% and set to fall to 17%. An LLP is not taxed itself, but its partners are taxed on their share of profit, whether or not they draw it from the business. Income tax rates are much higher than corporation tax, with the highest rate (on profits over ?150,000) being 45%. To the extent that undrawn profits remain in a company, they are taxed at relatively low corporate rates. It is only when the shareholders pay themselves dividends or a salary that income tax rates come into play. Therefore, for practices that are able to retain profits in the business, operating as a company can be more tax efficient.

Research & Development (R&D) tax credits

R&D tax credits are a form of tax relief designed to incentivise innovation and technological advancement. Typically, architects qualify when projects they are working on resolve a scientific or technological uncertainty. However, it is a corporate tax relief and therefore only available to companies, LLPs are exempt. In our experience, there are many practices eligible to make quite sizeable R&D claims, but cannot do so because of their structure.

Succession and staff retention

As firms grapple with attracting staff, it is an increasingly competitive market. At the same time, founders are looking to retire in the most tax efficient way possible. Share based employee ownership is becoming a popular method of ensuring buy-in from the younger generation and enabling succession. Share based schemes such as employee ownership trusts (EOTs) are one such vehicle available. The basic mechanics are the sale of a controlling interest to a trust, which holds the shares on behalf of employees. The sellers benefit from a capital gains tax free sale and the employees become indirect owners. There is also the potential to pay annual tax-free bonuses of up to 3,600 to each employee.

So which structure is better?

Having spent a large part of my career helping partnerships to become LLPs when the LLP Act first came in, I confess to having a soft spot for them. LLPs are flexible and they retain the old partnership ethos while at the same time encouraging a more robust approach to governance and internal decision-making. However, they can be tax inefficient. I also question whether LLPs are becoming outdated as a business structure. The pinnacle of a career in professional practices has always been to be made a partner but the current generation wants more than that and might not be prepared to wait. Share based employee ownership is proving to be a popular way to retain employee engagement and encourage future leaders.


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