With the Budget on 28 October, July’s Supreme Court ruling on LLP members, and another rise in dividend tax this year, many owners are reviewing their business structure. One question we hear increasingly often is whether you can simply change a limited company to an LLP. The short answer is no. You set up a new LLP and transfer the business, but that transfer can trigger tax costs that outweigh years of savings.
Key takeaways
- There is no legal conversion route: the business must move from the company to a new LLP, which needs at least two members.
- The move is treated as a transfer at market value, which can trigger corporation tax and, where property moves, Stamp Duty Land Tax.
- Extracting what is left in the company is costly, and anti-avoidance rules can tax a liquidation as income if the trade continues in an LLP.
- After the Supreme Court’s BlueCrest ruling, the LLP agreement largely decides whether members are taxed as self-employed.
- Model the full cost now, but avoid irreversible steps until the Budget announcements are known.
Why are business owners asking about switching to an LLP?
The main attraction is the tax treatment of profits. A company pays corporation tax of up to 25% on its profits, and shareholders then pay dividend tax when those profits are paid out. The basic and higher dividend rates rose by two percentage points in April 2026, to 10.75% and 35.75%.
An LLP pays no tax itself. Members pay income tax and Class 4 National Insurance on their share of profits, with no second layer of tax on exit. In our comparison of LLPs and limited companies, a higher earner taking profits through an LLP faced an effective rate of around 47%, against roughly 54% through a bonus or dividend, on the rates then in force.
Last year’s speculation about an employer-style National Insurance charge on LLP members also came to nothing, as we covered in what the Autumn Budget could have meant for LLPs.
Can you simply convert a limited company into an LLP?
No. A traditional partnership can move into an LLP largely tax-neutrally, but a company has no equivalent route. Because the company and the LLP are separate legal entities, the business must move from one to the other.
In practice, that usually means three steps:
- Set up a new LLP. It needs at least two members, so a sole owner will need a second member, such as a spouse, a colleague or the company itself. Our guide on how to set up an LLP covers the formalities.
- Transfer the company’s trade and assets to the LLP: goodwill, equipment, contracts, staff and, in some cases, property.
- Deal with the company afterwards, either by winding it up and distributing what is left to shareholders, or by keeping it for another purpose.
There are practical points to plan for too:
- Approvals. Because the directors usually become LLP members, the transfer may be a substantial property transaction that requires shareholder approval. A formal solvent liquidation afterwards requires a special resolution (75% of votes).
- The business name. The company can change its own name first, freeing up the existing name for the new LLP.
- Registrations and contracts. The LLP is a new entity with its own registration number. VAT, PAYE, bank accounts, leases, finance agreements, and licences must be transferred, re-registered, or renewed, and staff move across under TUPE.
- Timing. A transfer at the company’s year-end usually keeps the final accounts simpler.
What are the tax costs of moving out of a company?
Because the company and the new LLP are connected, HMRC generally treats the assets as passing at market value, whatever is actually paid. That can trigger:
- Corporation tax in the company. Gains on property and goodwill built up over the years can be taxed as if the company sold the assets. For an established business, goodwill is often the largest single value.
- Tax on extracting what is left. Once the trade has gone, value still sits in the company. Paying it out as dividends attracts dividend tax. A liquidation is normally taxed as capital, but an anti-avoidance rule can treat it as income if the owners carry on a similar trade within two years. HMRC’s own guidance gives moving the trade into a partnership as an example. Even where capital treatment survives, Business Asset Disposal Relief is now charged at 18% for disposals from 6 April 2026.
- Stamp Duty Land Tax. Where property moves across, special partnership rules decide the charge. Depending on who is connected to whom, they can reduce it significantly or leave a substantial bill.
- VAT and losses. A transfer of a going concern can usually avoid VAT if the conditions are met, but trading losses built up in the company generally stay behind.
Disincorporation relief, which once eased this for small businesses, expired on 31 March 2018 and has not been replaced. Some reliefs still help at the margins, such as electing to transfer plant and machinery at its tax written-down value, but the overall bill needs modelling before anything moves.
Can you keep the company as a member of the LLP?
Some owners consider a middle route: the company stays in place and becomes a corporate member of the new LLP, alongside the individuals. This can avoid winding up the company and allow some profit to be retained at corporation tax rates.
It can work where it reflects how the business genuinely operates, but mixed-membership rules allow HMRC to reallocate profits from a corporate member back to the individuals where the arrangement is mainly tax-driven. Property businesses face extra scrutiny: HMRC’s Spotlight 63A sets out why it believes hybrid landlord LLPs with corporate members fail.
Will every member be taxed as self-employed?
Not automatically. Under the salaried member rules, an LLP member who looks more like an employee can be taxed as one, with the LLP paying employer National Insurance at 15% on their drawings.
The Supreme Court’s judgment in HMRC v BlueCrest on 1 July 2026 tightened the position. It confirmed that a fixed or performance-based reward that does not genuinely track the LLP’s overall profits can count as disguised salary. It also held that courts assess whether a member has significant influence largely by their enforceable rights under the LLP agreement, not their day-to-day role.
For owners leaving a company, this matters most when the LLP includes people other than the current owners, such as senior staff or family members brought in to meet the two-member requirement. Design the LLP agreement and profit-sharing terms with these rules in mind from day one.
What does this mean for you?
A switch is more likely to make sense where:
- the business has modest goodwill and few valuable assets, so the exit charges are small;
- the owners draw most of the profits each year rather than retaining them;
- several people share ownership and value the flexibility of an LLP agreement;
- the expected annual saving is large enough to repay the one-off costs within a sensible period.
It is less likely to work where there is significant goodwill or property, or where profits are usually reinvested, because LLP members are taxed on their full profit share whether they draw it or not.
Timing matters as well. With the Budget on 28 October, model the options now but hold off on irreversible steps until the announcements are known. If you are weighing up the structures from scratch, our articles on the benefits of a Limited Liability Partnership and the tax benefits of an LLP are a useful starting point.
Frequently asked questions
How long does it take to move from a company to an LLP?
Registering the LLP itself can take as little as a day. The full process, including valuations, consents, the transfer and winding up the company, often takes several months.
What happens to profits left in the company?
They stay in the company until paid out, either as dividends or on a liquidation. If the trade continues in an LLP, HMRC can tax a liquidation as income rather than capital, so this is often the highest cost of switching.
How can we help?
The team at Wilkins Southworth have advised on company and LLP structures for over 30 years. We model the full picture, from the one-off exit costs to the ongoing tax position, so you can see whether a switch pays for itself. If it does, we can plan and manage the transfer. If not, we can look at what could be improved within your existing company. With the Budget approaching, get in touch to review your structure before you commit.