Corporate Member of a Law Firm LLP and the Mixed-Membership Rules

Can a company be a member of a law firm LLP?

Yes, a company can be a member of a law firm LLP, and its profit share is charged to corporation tax rather than to the individual partners' income tax. That rate gap, corporation tax at 19% to 25% against income tax of up to 45% plus Class 4 National Insurance, is the whole appeal of a corporate-member structure. But before any firm reaches for it, the honest position must be stated plainly: the mixed-membership partnership rules in ITTOIA 2005 sections 850C to 850E were written precisely to defeat the abusive version of this plan. Where profit is allocated to a corporate member in excess of its genuine commercial return, and the individual partners can enjoy that profit or have deferred their own profit into it, the excess is reallocated back to the individuals and taxed on them at their normal rates.

So a corporate member is not a clean way to halve a partner's tax. It works only to the extent the company earns its appropriate notional profit: a real return on capital it has actually contributed, plus an arm's-length charge for services it actually provides. Anything above that is exposed. This guide explains the structure, then sets out in detail when section 850C bites, so you can understand the rules before you build anything. It is written as "know the law first," not as a how-to-avoid-tax page.

What a corporate member of a law firm LLP is

An LLP is tax-transparent under ITTOIA 2005 section 863: it pays no corporation tax on its trading profit, and each member is taxed on its allocated profit share. Crucially, a member can be a company as well as an individual. Where a company is admitted as a member, its allocated profit share is charged to corporation tax (19% on profits up to £50,000, marginal relief to £250,000, 25% above), not to the individual members' income tax. For more on how the individual members are taxed, see our LLP member taxation guide and our note on how LLP members are taxed in 2025/26.

There is also a regulatory dimension. A corporate member raises SRA authorisation and ownership questions: depending on who owns the company, admitting it can take the firm from a recognised body into licensed body (ABS) territory under Part 5 of the Legal Services Act 2007. That analysis must run alongside the tax one. If you are weighing structural change more broadly, our guide on converting a law firm to a company or ABS covers the authorisation routes in detail, and our incorporation decision guide works through the simpler question of whether to incorporate the whole firm into a company instead of using a corporate member.

It is worth being clear at the outset about what a corporate member is and is not. It is not the same as incorporating the firm. Incorporating means transferring the whole practice into a company, which becomes the regulated entity; the partners become directors and shareholders, and the firm's profits are taxed as company profits. A corporate member, by contrast, leaves the LLP in place and merely adds a company as one of its members, so part of the profit is allocated to the company and the rest continues to be taxed on the individual members. The corporate-member route is therefore a partial, surgical change to where some profit sits, not a wholesale change of entity, and that is precisely why the anti-avoidance rules scrutinise it: it is an easy structure to bolt on for purely tax reasons.

Why firms reach for it: capping profit at the corporation-tax rate

The theory is straightforward. The LLP allocates a slice of its profit to the corporate member; that slice is taxed at the corporation-tax rate rather than at the individual partners' marginal rate; and the after-tax profit is retained inside the company to be reinvested in the firm. On a large profit slice, the rate difference between corporation tax and top-rate income tax plus Class 4 looks substantial, which is why the structure became popular.

The appeal is real, but it comes with an immediate counterweight that this page exists to explain. Parliament saw the same arithmetic and legislated against the version of it that simply diverts the partners' own earnings into a company they control. The next section is the load-bearing one: it sets out exactly how the anti-avoidance rule works, because the difference between a structure that survives and one that achieves nothing is entirely a matter of substance.

It also helps to see why the rate gap looks so tempting on paper before the rules close it down. An individual member at the top of the income-tax scale pays 45% income tax plus 2% Class 4 National Insurance on the slice of profit above the additional-rate threshold, an effective rate approaching 47%. A company pays corporation tax of 19% on profits up to £50,000, marginal relief between £50,000 and £250,000, and 25% above that. On a large profit slice the headline difference between roughly 47% and 25% is over twenty percentage points, and it is that gap a firm hopes to capture by routing profit through a corporate member. The mixed-membership rules do not deny the gap exists; they deny the firm the ability to capture it where the company has not genuinely earned the profit. That is the distinction the rest of this guide turns on.

The mixed-membership rules: the core anchor

The governing provision is ITTOIA 2005 section 850C, "Excess profit allocation to non-individual partners", inserted by Finance Act 2014 Schedule 17 with effect from 6 April 2014. It sets up two parties. "A" is an individual partner and "B" is a non-individual partner (the company): section 850C(6) provides that a partner is an "individual partner" if the partner is an individual, and "non-individual partner" is read accordingly. The rule applies where the ordinary profit-allocation calculation for A would produce a profit, and it operates to move profit from B (the company) back to A (the individual) when the conditions are met.

The mechanism is in section 850C(4): where a trigger condition is met, A's profit share is increased by so much of the amount of B's profit share as, it is reasonable to suppose, is attributable to A's deferred profit or A's power to enjoy. In plain terms, the diverted profit is pulled out of the company's share and taxed on the individual partner at their ordinary income-tax and Class 4 rates. The whole rate arbitrage is reversed for the excess. The two ways that trigger can fire are the next thing to understand.

The two trigger conditions

Section 850C bites through either of two pathways. Only one needs to apply.

The deferred-profit pathway

This pathway is met where amounts representing A's deferred profit are included in B's profit share, and in consequence both A's profit share and the relevant tax amount are lower than they would otherwise have been. "Deferred profit" means any remuneration, or other benefits or returns, the provision of which to A has been deferred. The target here is a firm that takes what is really an individual partner's earnings, defers them, and routes them through the company to suppress the individual's current tax.

The power-to-enjoy pathway

This pathway requires three elements together: B's profit share exceeds the appropriate notional profit; A has the power to enjoy B's profit share; and the whole or part of B's profit share is attributable to that power to enjoy. The power to enjoy typically arises where the individual partner is connected to the company (connection read with ITA 2007 section 993) or where arrangements let the individual benefit from the company's profit. This is the pathway that catches the classic structure: a company the partners own and can draw on, allocated more profit than its genuine return justifies.

Where either pathway is met, section 850C(4) increases A's profit share by the part of B's share attributable to A's deferred profit or power to enjoy, on a just and reasonable basis. The result is the same: the excess is taxed on the individual.

The appropriate notional profit carve-out

The power-to-enjoy pathway only reaches the profit above the company's appropriate notional profit, and that figure is the practical heart of the analysis. Section 850C(10) to (11) defines the appropriate notional profit as the sum of two parts: an appropriate notional return on capital and an appropriate notional consideration for services. The capital return is, broadly, what the company would receive for the period in respect of the capital it has genuinely contributed to the firm, calculated at a commercial interest rate, less any returns it has already received outside the profit share. The services element is an arm's-length charge for services the company actually provides.

The consequence is the substance test in practice. A corporate member that contributes real capital and bears real risk can keep a commercial return on that capital and function, taxed at the corporation-tax rate, without reallocation. Only the excess above that notional profit is exposed to section 850C. So the question is never "can we allocate profit to the company?" but "how much profit genuinely belongs to the company on a commercial measure?" A company with negligible capital and no real function has a tiny notional profit, so almost everything allocated to it is excess.

It is worth dwelling on each component, because firms routinely overestimate both. The notional return on capital is anchored to a commercial interest rate on the capital the company has actually put into the firm. If the company subscribed, say, modest capital, the notional return on it is correspondingly modest: you cannot manufacture a large notional profit out of a small capital base by asserting an aggressive rate of return, because the measure is what the company would commercially receive, not what the partners would like it to receive. The notional consideration for services is an arm's-length charge for services the company genuinely provides to the firm. A company that does nothing more than hold a bank account and receive profit allocations provides no services, so this element is nil. A company that genuinely employs staff who do the firm's back-office work, or that owns and maintains the premises the firm uses, can support a real services charge. The honest discipline is to ask, of every pound the company is allocated, "what did the company do or risk to earn this?" Anything you cannot answer is excess.

The companion sections: s.850D and s.850E

Two further sections complete the regime, and both should be stated precisely.

Section 850D, "Excess profit allocation: cases involving individuals who are not partners", extends the reach of section 850C to an individual (A) who provides services to the firm but is not a partner, where a corporate partner's share carries that individual's deferred profit or power to enjoy. It closes the gap that would otherwise exist if the individual whose earnings are being diverted simply was not made a member of the LLP.

Section 850E, "Payments by B out of the excess part of B's profit share", is a relieving provision. Where section 850C(4) or section 850D(4) has already applied to reallocate profit to the individual, a later payment by the company (B) out of that reallocated excess to the individual (A) is not treated as the individual's income, nor as a distribution, nor as deductible: this prevents the same profit being taxed twice, provided the payment is not part of tax-avoidance arrangements. One point of accuracy worth flagging: sections 850C to 850E are all profit-allocation provisions. The separate mixed-membership loss restriction sits elsewhere (in the loss-relief rules) and is outside the scope of this guide.

When a corporate member structure genuinely works

Strip away the anti-avoidance framing and there is a legitimate structure underneath, for the right firm. A corporate member works where it has genuine commercial substance: the company has real capital at risk, performs a real function (for example, it owns the firm's premises, carries the lease, employs support staff, or funds growth), and the profit allocated to it reflects that contribution rather than diverting the individuals' earnings. In that case the company's appropriate notional profit is meaningful, and the profit it retains legitimately sits at the corporation-tax rate.

The discipline is "substance first." Build the function and the capital, document them, and let the profit allocation follow the commercial reality. A structure designed the other way round, deciding how much tax to save and then dressing a company up to receive that profit, is exactly what section 850C reverses. This is also why the structure is not a quick fix: it requires a genuine reorganisation of where capital and risk sit in the firm.

A useful way to test a proposed structure is to ask whether it would still make commercial sense if the tax advantage were removed. If the company exists because the firm genuinely needs a vehicle to own its premises, hold capital, and carry risk, and would do so even in a tax-neutral world, the structure has substance and the company's commercial return is defensible. If the only reason the company exists is the rate gap, and it would be dismantled the moment the tax advantage disappeared, that is a strong signal the profit allocated to it is excess and will be reallocated. HMRC, the mixed-membership rules and the general anti-abuse rule all look through to that commercial reality, so the firm should look through to it first. The structures that survive are those where the company was going to be useful anyway, and the tax treatment simply follows.

Interaction with the salaried member rules and with extraction

Two related points round out the picture. First, the mixed-membership rules are not the same as the salaried member rules (ITTOIA 2005 sections 863A to 863G), although both came in with Finance Act 2014. The salaried member rules can recharacterise an individual member as an employee for tax; the mixed-membership rules target profit diverted to a corporate member. A firm using a corporate member should check its individual members against the salaried member rules separately; our salaried member rules explainer and our note on partner profit allocation cover those.

Second, even a genuine structure usually only defers tax. Getting profit out of the corporate member to the individuals later costs dividend tax (10.75% ordinary or 35.75% upper from 6 April 2026 under Finance Act 2026 c.11 section 4, after 8.75% and 33.75% in 2025/26) or salary plus employer National Insurance at 15% above the £5,000 threshold. If value leaves as a loan to a participator, section 455 applies (33.75% before 6 April 2026, 35.75% on or after). So the combined two-layer cost on eventual extraction is often close to the income-tax cost: the win is reinvestment inside the firm, not a lower lifetime tax bill. Our note on LLP profit extraction strategies covers extraction more generally.

Worked sketches

The sketches below are illustrative only and are not advice. They are designed to show how the appropriate-notional-profit test plays out in practice.

The version that fails

An LLP has two individual members who form a new company, owned by the same two individuals, and admit it as a third member. A large profit slice is allocated to the company "to save tax," but the company has subscribed negligible capital and performs no function, and the individuals can draw on its funds at will. Run section 850C: the company's appropriate notional profit is tiny (almost no capital, so almost no notional return; no real services, so no notional charge), its profit share vastly exceeds that figure, and the individuals plainly have the power to enjoy it. Section 850C(4) reallocates the excess back to the individuals, taxed at their marginal income-tax rates plus Class 4. The caption is blunt: the rate arbitrage is reversed, and the structure achieves nothing but cost and risk.

The version that survives, within limits

The same firm, but the corporate member subscribes real capital, uses it to fund and own the office fit-out, carries the property lease, and bears genuine risk on that investment. Its commercial return on that capital and function is its appropriate notional profit, which it keeps at the corporation-tax rate. Only profit allocated above that notional figure would be exposed to section 850C. The caption: substance defines how much the company can legitimately retain, and that ceiling is set by the company's real contribution, not by the partners' tax ambitions.

The deferral, not saving, point

Take profit genuinely retained in the corporate member at the corporation-tax rate. Extract it later to the individuals as a dividend at 10.75% or 35.75% from 6 April 2026, and the combined cost of corporation tax followed by dividend tax lands close to the income-tax cost on the same profit. The caption: the benefit is timing and reinvestment inside the firm, not an absolute cut in the lifetime tax bill.

Practical and regulatory cautions

If a corporate member could genuinely suit your firm, the groundwork matters more than the idea. Document the company's capital contribution and the function it performs, because the appropriate notional profit, and therefore how much profit the company can retain without reallocation, stands or falls on that evidence. Expect HMRC scrutiny: the mixed-membership rules are an active enforcement area, and the general anti-abuse rule sits behind them. Resolve the SRA authorisation position (recognised body versus licensed body or ABS under Part 5 of the Legal Services Act 2007) before, not after, the structure goes in.

This is one of the more technically sensitive structures in law-firm tax, and the gap between a defensible arrangement and an ineffective one is entirely about substance. If you are considering admitting a corporate member, or have inherited a structure and want to know whether it stands up, speak to a legal-sector-specialist accountant who can test the capital, the function and the profit allocation against sections 850C to 850E before anything is filed.