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Partnerships and transactions: taking the right route

Partnerships and transactions: taking the right route

Buying and selling a partnership is a complex undertaking. You need to think carefully about the right structure for your business before going into a transaction.

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Sectors where partnership structures are common seem to be in a period of consolidation. At KPMG, we’re seeing increasing numbers of such businesses being acquired.

The sectors in question are usually concerned with selling their time and expertise and are often professional services. Law, accountancy, consultancy and veterinary are industries where partnerships are common. 

However, transactions involving partnerships or limited liability partnerships (LLPs) are more complicated than buying and selling companies – and so are the tax implications.

Complexities and consequences

Buying a partnership means buying a collection of assets, such as stock, debtors, goodwill and/or property. And there are distinct complexities to partnerships that make transactions more difficult: 

  • Different partners may own and share profits from different parts of the business, for example perhaps the business is split into a number of different regions or divisional operations.
  • Different partners may have different statuses. For example, some may have fixed profit shares, while others are entitled to capital. Also, the ownership of the equity in the business will be often different to how the profits are divided.
  • Some (or all) of the partners may intend to retire when the business is sold; or some may plan to stay, and will need to understand how their tax position is affected.
  • The partnership itself may own a company – for example, a law practice may have a subsidiary service company. 

These intricacies will have consequences for transactions, and can at times jeopardise them altogether. 

Some purchasers – especially those from overseas – may not be familiar with partnership businesses, or understand how they are structured from a legal perspective. And even if they’re familiar with them, buyers are often unaware of the complications involved.

What’s more, many tax advisers don’t understand the intricacies of partnership taxation. This can slow down a transaction or result in an unexpected increase in the tax liability. 

The incorporation question

Given these challenges, it can benefit partners to incorporate before going into a transaction, or before putting the business on the market. 

Incorporation may also have tax benefits. After the partnership business is transferred to a company, profits are subject to corporation tax at 19%, rather than income tax at up to 45%. This can be advantageous when profits are retained for reinvestment rather than being paid out and taxed as income in the hands of the recipients. 

In addition, certain deals have different tax consequences when a partnership is involved. This is so if an earn-out is required, for example. Or if the partners are expected to reinvest in the company after the sale (this is often a feature of private equity purchases). 

There are deals where a partnership may be more attractive. For instance if the purchaser wants the assets, rather than the organisation – such as an asset management firm’s ‘book’, rather than its advisers and historic advice

Making it pay

Whether you’re better off incorporating or remaining a partnership, it’s essential to plan in advance. 

This is particularly important in sectors where transactions are active. If you have a good business, a buyer might come knocking on the door at any moment.

Our experts can advise you and your partners on the best approach to a potential transaction. And we can help you to understand the tax consequences. 

We’ll take you through the incorporation process if that’s the option you decide on. Or we can advise you on alternative structures for your deal and the resulting tax treatment for your partners. 

Whichever route you take, you should never take on a transaction without specialist advice. Structuring the deal right will make your business more attractive and help you realise as much value as possible from the sale. You may only sell a business once in your life: make sure it pays.

 

Please contact Craig Rowlands or Nick Pheasey if you have any further questions.

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