Tax savings “outweigh complexity” of moving from partnership to limited company

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By Legal Futures

21 October 2010

Calculating move: ultimately the decision is about the bottom line

Solicitors’ firms put off becoming limited companies by the complexity of conversion from partnerships are missing out on “very substantial” tax savings, according to one former firm that incorporated successfully three years ago.

The numerous advantages of incorporation over traditional partnerships and LLPs outweigh the disadvantages, Chris Sellars, a director at Banner Jones Limited, the company behind Sheffield and Chesterfield-based Banner Jones Solicitors, said this week.

Speaking at a conference sponsored by IRIS Legal Solutions in London, Mr Sellars said incorporation was a “difficult concept  to get your head around”. But if firms sat down with an accountant and examined the figures, he was confident “it will lead you to a point where you think ‘we can pay a lot less tax here’”.

Proof that his enthusiasm is more widely shared now than at any time since incorporation became possible 25 years ago, is seen in the numbers of firms switching from partnership. According to Mr Sellars, in March about 16% of the nearly 11,000 law firms regulated by the Solicitors Regulation Authority were limited companies. Just 11% were LLPs. Between 2009 and 2010, the number of firms incorporating grew by 26%.

Mr Sellars acknowledged that the partnership model has attractions, including the simplicity of moving money in and out of the firm. Also, high status still attaches to the position of  partner, he admitted. But partnerships also carry unlimited liability and higher earners incur high rates of income tax.

Meanwhile, LLPs have the benefits of partnership, along with limited liability, but enjoy no tax breaks and partners become ‘members’, a term not valued or understood by the public, he argued.

In contrast, with limited companies the owners’ liability is capped, the primary tax to be paid is corporation tax rather than income tax, and partners have the status of becoming directors. “The biggest advantage of all,” he said, is what he describes as the “golden egg” of incorporation – the directors’ loan account. “In reality this becomes a pot of money you can have at a 10% [rate of] tax.”

One very positive consequence of his firm’s incorporation, said Mr Sellars, is the introduction of share capital, which after the departure of some directors has resulted in uneven voting rights within the former partnership. This has led to “a real sea change in mentality” and “more modern thinking”.

Ultimately it will be the bottom line which determines whether partnerships take the plunge, Mr Sellars predicted: “If you take the decision and you run the numbers and you work out what tax is going to be paid, my view is that you will come to the conclusion that you should incorporate and that it’s the best business structure for you going forward.”

He added: “I wouldn’t like to quantify how much tax we’ve saved, but it is very substantial.”

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