Alternative Business Structures – a “hybrid” structure

In our seminar in June we highlighted the opportunities and threats that ABS might present. The idea of a hybrid structure consisting of a partnership or LLP with some or all partners/members being limited companies is also back on the agenda This is not a new concept but interest in it has increased as the gap between corporate and personal tax rates has widened.

One model on which we have advised, allows partners to participate in the “super profit” generated by their contribution to the business and can allow those profits to be taxed at comparatively lower capital gains tax rates. This can be achieved by the sale of the capital interest in the partnership or LLP to a limited company of which some or all the partners are directors.

When creating a corporate member for this purpose some things to consider are:

• how a goodwill value can be justified

• the impact on new, often younger partners

• how goodwill might affect a future merger

• succession planning and ownership of the corporate member

• dispute management

 The “hybrid” can also be useful if a firm wants to build up its reserves by not fully drawing all its profits from the business. Drawn and undrawn profits in a partnership or LLP are liable to be taxed at a top rate of 52% and it therefore makes sense to direct the undrawn element (part of working capital) to a corporate member where it can be taxed at a top rate of 26% with the possibility that this will reduce to 23% over the next few years.

When creating a corporate member for this purpose it is important to be clear about the following:

• its purpose and how this fits with the firm’s overall strategy

• the proportion of its share in the profits of the partnership (or LLP)

• its ownership

• what happens when a partner/member joins or leaves?

• what is the exit route should a corporate member no longer be needed or required?

 There may be opportunities for tax planning but these have to take into account the longer term plans for the business and the risk that a structure which works under current tax rules may not be so effective if the rules change.