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8-02-2019

Q: When is a partner not a partner?
A: When the individual is really an employee.

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‘Partner’ is a term that is often used but it can have a multitude of legal effects.

In traditional partnerships partners tend to be divided into two groups:

  • Equity Partners: These partners have their remuneration determined by the profits and losses of the business. Equity Partners have a say in the running of the business.
  • Salaried Partners: Salaried Partners are partners in name only. They are paid a fixed salary and often have little or no say in how the business is run.

The situation is even more complicated with a limited liability partnership or LLP. An LLP is like a company. The LLP has a separate legal personality. The owners of the LLP are called members but are often referred to as ‘partners’.

In an LLP there are often 2 classes of members:

  • Variable Share members, who are like Equity Partners in a traditional partnership.
  • Fixed Share partners, who are paid a fixed salary possibly with a very small profit share. Fixed Share partners often have very little say if any, in how the business is run. Often Salaried Partners and Fixed Share members are not provided with fill financial information by the partnership or LLP.

So why does it matter?

  1. HMRC are reviewing the taxation of LLPs to tackle the issue of disguised employment. HMRC has identified three conditions which if met means the individual member is a salaried member or employee. These are:
    1. The member is to perform services for the LLP in his or her capacity as a member and is expected to be wholly or substantially wholly rewarded through a “disguised salary” that is fixed, or if varied, varied without reference to the profits or losses of the LLP;
    2. The member does not have significant influence over the affairs of the LLP; and
    3. The member’s contribution to the LLP is less than 25% of the disguised salary.
      This is forcing LLPs to revisit their membership structure. As an avoidance measure, many are asking Fixed Share Partners to make greater capital contributions to avoid condition c. being met. The consequences of not addressing the issue properly is potentially claims for tax and fines.
       
  2. A genuine employee has employment protection rights including the right not to be unfairly dismissed, the right to maternity leave and pay etc. It is not unusual on the dismissal of a salaried partner or a member of an LLP, for that individual to try and argue that they are in fact an employee because it is advantageous for them to do so. Although recent cases have determined that a fixed share member of an LLP is not an employee, the law is still uncertain.
     
  3. From the individual’s perspective, being a Salaried Partner or a Fixed Share member carries with it a degree of risk an employee does not have to face. Salaried Partners are held out to the world as Partners and so they are broadly liable for the debts of the partnership in the same way as Equity Partners. While LLP’s have the advantage of having limited liability to third parties, Fixed Share partners are still vulnerable to having to repay to the LLP their remuneration on an insolvency even though they may, in reality, be nothing more than glorified employees. The requirement to repay can reach back over two years and can apply even if the member has since left the LLP. Further, becoming a member of an LLP may mean giving up some basic employment rights for very little return.

If you have any questions about the above matter, or any employment matter at all, don't hesitate to contact Sarah Rushton on the details below, or click here to email.

This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information.

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