Business Doctor: Partner’s departure may cause upheaval
JC writes: I am a partner in a small printing firm that trades as a limited liability partnership (LLP). I have two other partners and I need to plan for one of us to retire from the business in the next 12 months. I seem to remember that when someone left the business in previous years, when we were trading as a traditional partnership, there were different tax options available for either carrying on the same business or having a formal cessation and starting again. Do we have to make the same decisions with the new LLP?
In a traditional partnership, as you say, the remaining partners can decide on whether they wish to start again, in effect, as a new partnership — or simply continue the old partnership, writes Chris Lane, a partner at Kingston Smith. This decision is important in that it dictates how the partnership profits will be taxed; sometimes, having a formal cessation will lower the tax bills for the remaining partners. This is because of the rules on how profits are taxed at the start of a new trade.
But with an LLP the arrangement is slightly different, as it has a formal structure in many ways similar to a limited company and therefore continues automatically irrespective of any change in the underlying partners. In order to trigger a cessation, the LLP would need to be liquidated, and there would be costs involved. Normally, the LLP will continue to trade without having a formal cessation.
When the retiring partner leaves, they will be able to utilise the “overlap relief” that they would have from the start of the LLP, and this will be used against their final taxable profits.