LLP + partnership accounting
LLP and partnership accounting for UK law firms
Members of an LLP are self-employed for tax even though the LLP has separate legal personality. Salaried members can be deemed employees by the FA 2014 rules. The allocation, audit, and partner-by-partner self-assessment is what we do.
LLP tax treatment in plain English
LLPs are tax-transparent for income tax. The LLP itself does not pay corporation tax. Each member is taxed on their share of profit at personal rates plus Class 4 NI on their trading profit share. The LLP files an SA800 partnership return; each member files their own self-assessment.
The legal personality of the LLP gives limited liability protection to members. The tax treatment mirrors a general partnership. This is why most multi-partner law firms converted from general partnership to LLP in the 2000s.
The FA 2014 Salaried Member Rules
From 6 April 2014, a member of an LLP is deemed an employee for tax purposes if all three of the following conditions are met. PAYE then applies to their drawings as if they were salary.
- Condition A: 'disguised salary' — at least 80% of the total reward from the LLP is fixed or determined without reference to profit
- Condition B: limited influence — the member has only limited rights to influence the LLP's affairs (no meaningful management role)
- Condition C: capital contribution — the member's capital contribution is less than 25% of their disguised salary for the period
Why the FA 2014 audit matters quarterly
The position is dynamic. A salaried partner who passed the three-condition test last year might fail this year if their bonus rises, their capital contribution proportion changes, or their role expands.
Quarterly audit catches drift early. We model each salaried/fixed-share partner against the three conditions and either confirm partner-tax treatment continues, or flag the trigger requiring PAYE. The wrong answer for the wrong year can trigger PAYE backdating and HMRC interest.
Partner capital + interest relief
Partners typically buy in to an LLP with a capital contribution. Borrowing to fund the buy-in attracts qualifying loan interest relief under ITA 2007 s.398: the interest paid on the loan is deductible from the partner's personal taxable income. The relief is per-partner; we set up the documentation so it's claimable each year on the partner's self-assessment.
Frequently asked
- How is LLP profit allocated between members?
- However the LLP agreement says. The default is equal shares; the typical structure for law firms allocates by partner unit / equity points. Profit allocation can be: fixed-share (a fixed monetary amount), equity share (a percentage of remaining profit), or hybrid. The methodology must be documented in the LLP agreement and applied consistently.
- Do LLP members pay employer NI on their drawings?
- Generally no, because LLP members are self-employed for tax (Class 4 NI on profit, not Class 1 employer/employee NI). The exception is salaried members who fail the FA 2014 test and are deemed employees — PAYE applies on their drawings including employer NI.
- What happens to partner accounts when a partner leaves?
- The LLP agreement governs. Typically the leaving partner is entitled to their capital contribution back (sometimes phased over 1-3 years), their final allocation of profit up to leaving date, and any vested deferred compensation. The accounting treatment requires careful tracking; we manage the partner ledger across the transition.
- Should we convert from general partnership to LLP?
- For most multi-partner firms, yes. LLP gives limited liability protection while preserving the partnership tax treatment. The conversion is administratively simple. The exception is very small firms (2 partners, low turnover) where the Companies House filing obligation may outweigh the liability protection. We model the conversion economics on a per-firm basis.
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