LLP’s and insolvency? Isn’t it just like a limited company?
No. There are significant differences between the position of a partner (or member) of an LLP and a director of a limited company. Unfortunately, too often, partners of an LLP only become aware of these differences once it’s too late to do anything about it.
Overdrawn current and capital accounts will have to be repaid to the LLP, in the same way as a director’s overdrawn loan account of a limited company.
A member is likely to have regular drawings which may be referred to as ‘salary’. The legal position of these drawings is that they are a payment on account of profits, but if the LLP makes no profit, or a member’s share of profits is less than their drawings, or the LLP’s profit is not allocated to members any excess drawings are repayable.
If a member’s capital and current accounts, in total, are in credit, after taking into account drawings, that member will not have a personal liability to the LLP. But, if any payment was made to a member at a time the LLP was unable to pay its debts such payments may be claimed back on a formal insolvency. This is not a dissimilar rule to directors of limited companies and their loan accounts, but much more perilous to a member.
Any income tax liability for members on the share of the LLP profits is a personal tax liability. If the amount of tax due is not paid by the LLP, HMRC will seek to collect unpaid tax directly from the member. There may have even been a notional deduction of tax at the time the members received their drawings. Corporation tax is payable on any profits earned by a limited company and remains the liability of the company.
What happens to the actual losses of an LLP? The Statement of Recommended Practice (SORP) does not give any specific guidance. Losses should normally be charged to ‘other reserves’ in the same way that profits available for discretionary division are credited. But, what happens if profits are automatically divided? Should any losses be similarly divided and charged to the members accounts? That is the implication - and the members become liable for the losses.
So much will depend on the construction of the partnership agreement. Management accounts and the guidance from the LLP accountant take on an even more important role.
If you have any clients or contacts that have financial warning signs with their business (LLP or otherwise) please ask them to get in touch with me (Tim Corfield) or Richard Owen for a free, confidential chat – we will be able to help! In many cases a formal insolvency can be avoided – the sooner we get involved, the sooner we can help put a survival plan together.