It is an underappreciated fact that UK limited liability partnerships, which did not exist in UK law until 2001, are very different creatures from LLPs formed under the laws of overseas jurisdictions, such as those in United States, the Channel Islands and the Republic of Ireland. Because this, non-UK LLPs are treated differently in a number of important legal, tax and regulatory respects.
Most recently, changes to accounting and tax rules will allow more businesses, including US LLPs but not English LLPs, to adopt the cash basis of accounting, might tip the balance in favour of more US law firms headquartered overseas adopting or converting to a US LLP.
In this article, we discuss the key differences and the pros and cons of each.
What are the key differences between a UK LLP and a non-UK LLP?
An LLP incorporated under the laws of England & Wales, or other UK jurisdiction, is much more closely related to a company than it is to a partnership, despite the name. These LLPs are bodies corporate with a separate legal personality and are required to file annual accounts with Companies House.
The central difference between a UK company and a UK LLP is tax-related: the former pays corporation tax on profits, whereas the latter is tax-transparent, meaning the profits are taxed in the hands of the LLP’s partners.
Non-UK LLPs do not, in most cases, follow a similar model. They are typically more closely resemble general partnerships and may or may not have separate legal personality. They will usually have much less stringent filing requirements in their home jurisdictions and in many cases their membership will not be ascertainable from public records.
Advantages of trading in the UK with a foreign LLP
Cash-based accounting
The UK government has recently announced a proposed expansion to the range of businesses which can calculate taxable income using the cash basis rather than the accruals basis. Cash-based accounting is where revenue is recognised and recorded when the funds are received, rather than when the services are carried out and invoiced, which is known as the accruals basis. The accruals accounting basis recognises revenue (and therefore profits) before the cash is necessarily received.
Although cash-based accounting will remain off-limits to UK LLPs, LLPs and partnerships formed in overseas jurisdictions should, provided they meet certain criteria, be able to adopt cash-based accounting.
The salaried members rules do not apply
These rules, which we discuss in our recent article here, apply to UK LLPs and not to UK general partnerships or overseas partnerships or LLPs.
The salaried members rules are designed to ensure that UK LLPs do not avoid paying tax and employer national insurance contributions on behalf of employees by admitting them as members of the LLP, unless they bear one or more of three hallmarks of true partnership.
These hallmarks are (a) sharing in the profits where the amount received depends, at least in part, on the overall profitability of the business, (b) having significant influence over the affairs of the LLP or (c) contributing capital to the LLP in a sum greater than 25% of the expected fixed remuneration of the individual.
Compliance with these requirements is complicated and often onerous, particularly in light of recent changes to HMRC guidance discussed in our article. This is not something which non-UK LLPs need to worry about.
Reduced filing obligations and greater privacy
UK LLPs are required to file annual accounts with Companies House, which are available for inspection by the public. The detail to be set out in these accounts depend on the size of the business, but in many cases will require the firm to disclose its profits for the year, the state of its balance sheet at year-end, and the profit share of the highest-earning member.
These requirements do not apply to LLPs formed under the laws of a non-UK jurisdiction, meaning their accounting records are not filed with the UK authorities. This allows them to maintain a greater degree of privacy over their financial position and the profit shares of the partners.
But what are the disadvantages?
Less familiarity amongst regulators, HMRC, banks, landlords and other third parties
There are many different kinds of LLP, given that the laws of each jurisdiction will have their own model and structure, which will be augmented by case law. Just within the USA’s 50 states there will be significant variation in the nature of their partnerships and LLPs.
There is often an assumption by parties dealing with an LLP which trades in the UK that it will be UK-incorporated, with a full record of members, accounts and “persons with significant control” available for public inspection on the Companies House website.
The recently introduced requirements of the Economic Crime (Transparency and Enforcement) Act 2022 will have increased the public visibility of certain non-UK LLP at Companies House, but others will have no footprint on the website at all.
Because of this, banks, regulators (such as the SRA), landlords and HMRC may be at risk of mischaracterising the nature of the business, beneficial ownership or corporate structure of the firm, and/or may require further due diligence or personal guarantees compared with similar English LLPs.
Question over whether limitation of liability is effective
It is an untested question as to whether an English court would necessarily recognise the limitation of liability conferred by the laws of the home jurisdiction of a foreign LLP operating in the UK. UK-incorporated LLPs are a body corporate and can sue and be sued in their own right, leaving the members of the LLP shielded from liability in most cases, other than in particular circumstances (for example where they have expressly assumed liability via a personal guarantee).
Some non-UK LLPs, on the other hand, do not have separate legal personalities, and therefore more closely resemble UK general partnerships, which have unlimited liability. If a US LLP is simply an aggregation of its partners from time to time, then an English court might not uphold the statutory limitation of liability that they each enjoy under the law of the LLP’s home jurisdiction.
However, this is an unresolved question and there is a similar UK analogy provided by English limited partnerships formed under the Limited Partnerships Act 1907, which limits the liability of certain partners, despite the partnership not being a separate legal entity in a way that English LLPs are.
Worker rights
It is well-established following a UK Supreme Court decision in 2014 that members of a UK LLP can be a “worker” for the purposes of employment rights legislation, despite not being employees. A non-employee worker means:
an individual who has entered into or works under… any other contract… whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual…
In the context of UK LLPs, the LLP is the other party to the contract. However, as discussed above, many non-UK LLPs (and all English general partnerships) do not have a separate legal personality aside from the partners in the firm. This raises the question of whether the other partners in the firm can really be described as “another party to the contract” and therefore if the partner enjoys the protections conferred on workers under UK legislation. These include, for example, whistleblower protections and rights under the Working Time Regulations 1998.
This issue remains unresolved for now.
Should you consider converting from an English LLP to a foreign LLP?
LLPs formed under the laws of overseas jurisdictions are common feature of the UK business landscape, no more so than in professional and financial services.
However, it is not a straightforward process to convert from one to the other. English law does not provide a mechanism to “re-domicile” an English LLP to some other jurisdiction. This means all of the assets, liabilities, workers, contractual relationships, clients, suppliers, licences, registrations and regulatory approvals will need to be transferred manually from the existing LLP to the new one. If they can’t be transferred – for example an immigration sponsor licence – then new applications will need to be submitted.
This is a one-off process but not one which should be undertaken without due consideration. However, the additional benefit which the new rules on cash-based accounting may confer to non-UK LLP may well see this being given serious thought by firms currently operating in London as English LLPs.
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