Firstly, what type of partner will you be?
A salaried partner is a partner in name only. You will continue to be an employee and therefore maintain your employment rights.
An equity partner is an owner of the business. You could be either a fixed or priority share equity partner or full equity partner.
What financial issues should potential new equity partners consider?
The LLP agreement should clarify some financial queries you may have such as:
- Will I have to pay in a cash contribution (capital)?
- When will I be paid my profit share (drawings)?
- Will the LLP make tax payments on my behalf (tax reserving)?
It is important to understand the firm’s finances before signing up to partnership.
Here are some questions to consider:
- How will becoming an equity partner affect what I earn?
- Will I be paid gross or net of tax? Do I have the choice?
- If I’m paid net, on what basis does the firm reserve for tax? Am I able to see the tax reserving forecasts?
- Will I see the statutory accounts? Are they audited?
- What management accounts information will I see?
- Is the firm funded by the capital contributions from the partners or is there external bank financing? What is the average capital per partner and is this the same for each partner?
- How financially stable is the firm? Have the overdraft or bank loan covenants been breached in the past?
- Has the firm been in any trouble with its regulator? (E.g. the SRA, ARB, RICS etc.)
There are two key differences to note once you become an equity partner:
- You are now self-employed and therefore lose your employment rights. Things like pension contributions will become your own personal responsibility.
- Tax will be paid in January and July each year rather than monthly through PAYE. You are taxed on your profit share whether you have drawn it or not. The extent to which you can draw your profit share will be determined by the cash flow requirements of the business.