Getting the Structure of your Business right

In the second of his series of articles, Craig Oliver, Company and Commercial Solicitor to Stokes Partners LLP, continues his look at the typical business structures that are open to a Practice to adopt, and a more detailed look at what it means to start out as a partnership or as a limited liability partnership.

Partnerships

This type of structure will be suited to those set-ups which have more than one owner, but otherwise shares several similarities with the sole trader arrangement we looked at in the last issue.

It enables capital to be brought into the business by the introduction of new partners, and this may be a more attractive proposition to the business than increasing bank borrowings.

Of particular note though is that, as a partnership, each partner will become individually liable for the entire debt of the business, even if one of the partners alone, for example, has incurred those debts, and whether or not the other partners had knowledge of them.

A written partnership agreement setting out the terms of agreement between the partners would be strongly advised. In the absence of an agreement, or where an agreement is silent in a particular area, the Partnership would be governed by the Partnership Act 1890. However, this does not provide a comprehensive set of rules or procedures and perhaps more relevantly is certainly unlikely to be relevant for the modern practice.

A written agreement would:

  • record the capital contribution from each partner
  • set out how property owned by the partners is to be held for the partnership
  • state how the profits and losses are to be borne by the partners, and determine an acceptable level of drawings
  • establish the duties, obligations, and restrictions to be placed on a partner, and make provision for an indemnity from that partner to the others, where there has been a breach, including for example where a partner has incurred partnership debts without the knowledge of the others
  • make specific provision for maternity, paternity, adoption and parental leave
  • make specific provision for the expulsion of a partner where there has been a breach of the agreement, and deal with how that partner’s share in the business (including any property within the partnership) is to be valued and then repaid, and over what timescale
  • likely deal with the issue of succession and ensure that the business continues following the death of a partner, and as above will also make provision for the payment out of the relevant share to the deceased’s estate

Limited Liability Partnerships (LLP)

As its name suggests, an LLP offers more protection to its individual partners (otherwise referred to as members). It is neither a partnership nor a company. It does however exhibit elements from each – effectively offering the flexibility of a partnership type structure, with the benefits of limited liability for its members.

Like a company, an LLP is a corporate body. Registration is therefore required at Companies House, and there will be modest set up costs attached with that. The issues to consider when choosing a name for the LLP are similar to those for choosing a company name. With registration at Companies House, and the accounting and filing requirements being broadly the same as those of a company, the adoption of an LLP structure does therefore bring with it the sacrifice of a certain degree of privacy which may not be attractive to all.

An LLP is regarded as a separate legal entity. It has no directors or shareholders, and no share capital. A member can be an individual or in fact another corporate body. Although an LLP must have two members at all times, it will continue to exist even if the number of members falls to one. In the latter case, if the membership remains at one for a period of more than 6 months, then that person becomes jointly and severally liable with the LLP for the debts incurred during that period. The profits of the LLP will be taxed in the same way as a partnership.

In the absence of an agreement, an LLP will be governed by the Limited Liability Partnerships Act 2000. The legislation puts in place various default provisions including for example that all members are entitled to share equally in the capital and profits of the LLP, and the requirement that a member cannot be expelled by the majority of the members, unless of course that member agrees.

Like a partnership, the relationship between the members can be governed by a private agreement. This will be confidential to the members and does not need to be filed at Companies House.

A members’ agreement would normally deal with issues such as:

  • the name of the LLP
  • ownership of properties from which the LLP is to operate
  • the requirement for members to contribute capital to the LLP – there is otherwise no obligation
  • how to share profits
  • who is to be responsible for management, and how decisions will be made
  • limitations on a member’s authority
  • how members are to be appointed
  • when and how members can retire or be expelled

Within the constraints of a short article, it is of course very difficult to set out in full the advantages and disadvantages of adopting an LLP structure, but I hope that I have at least given a sense of what is likely to be involved and most importantly emphasised the importance of having a formal written agreement for whichever structure you elect for your business. As always, your interests are best served by seeking professional advice from specialist accountants and solicitors.

In our next edition, Craig will examine the advantages and drawbacks of adopting the structure of a Company for your business.

Craig can be contacted on 01460 279293 or by email at [email protected] for further information.

craig-oliver-large  Craig Oliver, Assistant Solicitor