With speculation mounting that the Chancellor may introduce National Insurance levies on LLPs in the upcoming 26 November Budget, many law firm leaders are beginning to assess their structural options in order to try to mitigate any additional tax. One route under consideration is converting from an LLP to a Limited Company.
A change to a Limited Company may also appeal to firms who are considering selling to an Employee Ownership Trust (EOT) (as this route is not available to LLPs).
Changing from an LLP to a company is not a simple decision. There are many aspects to consider including the time, cost and disruption. Below, we outline key considerations and the practical steps involved in making such a transition.
Structural Considerations
It’s important to note that LLPs cannot be directly “converted” into companies. Instead, a new company must be incorporated, and the LLP’s assets and operations transferred to it.
Partners (or LLP members) would become shareholders in the new company. While limited liability remains, the shift to share ownership introduces less flexibility around profit distribution, capital contributions, and voting rights.
Remuneration would be paid via salaries and dividends, rather than profit share.
Key Steps in the Process
Due Diligence
A comprehensive review of the firm’s assets, liabilities, and contractual obligations is essential before any transfer.
Tax Implications
The tax treatment of incorporation depends on the nature of the assets being transferred. Reliefs are available under direct tax legislation, and VAT and Stamp Duty Land Tax (SDLT) can often be mitigated through specific provisions. However, these reliefs are conditional and must be carefully navigated to avoid unintended tax charges. Professional tax advice is strongly recommended.
Property
Freehold property must be transferred or retained and leased to the company. Leasehold property typically requires landlord and lender consent for assignment or underletting. Any existing security arrangements may also need to be restructured, potentially incurring delays and costs.
Banking
Early engagement with banking partners is crucial. Client accounts may need to be re-established, and existing loans or facilities novated. Security arrangements will likely need to be replaced. Partner capital loans would be replaced with shareholder loans, and banks may seek personal guarantees — though this should be resisted if overall exposure remains unchanged.
Employees
Under TUPE regulations, employees will transfer automatically to the new entity on existing terms. However, a formal consultation process is required, and future changes to employment terms may be more difficult.
Contracts and Insurance
All client and supplier contracts must be transferred, with some requiring third-party consent. Insurance policies, including professional indemnity cover, must also be updated.
Regulatory Approvals
Approval from the SRA for a change of legal entity is required and can take up to 90 days. The new company will also need Anti-Money Laundering authorisation, which may be more rigorous under the FCA regime.
Governance Documents
The company will require a new constitution, including articles of association and a shareholders’ agreement, replacing the LLP’s members’ agreement.
Next steps
If your firm is considering structural change in light of the proposed tax reforms, we would be happy to advise on the legal, tax, and regulatory implications — and guide you through the process.
Speak to our team
For more information please contact Kelvin Balmont by visiting his profile below.
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