Companies, Partnerships and Directors
Which business structure works best for you? The old, the new or the hybrid? The choice is an old (and probably familiar) one – should you trade as a sole trader, a partnership or a limited company?
Choosing a business structure
A sole trader or partnership may have favourable tax treatment, be simpler and cheaper to set up, but it does bring with it the old chestnut of unlimited personal exposure and liability. Not to be underestimated in these days of continuing economic uncertainty and an increasingly litigious environment. Trading as a limited company, therefore, might well be seen as more attractive – limited liability (save for any personal guarantees you might be forced to give), a separation of assets and the business from you as an individual and a simpler model for involving third parties in the operation of the business or as investors. Higher accounting and compliance costs, perhaps, but benefits all the same.
Limited Liability Partnership
Then along came the Limited Liability Partnership or “LLP”. An improvement on the old partnership model, because it gives limited liability and a separate legal entity, but is still largely “tax-transparent” therefore offering the tax advantages familiar to those of you operating in non-corporate structures. It is fair to say that the LLP has not been as popular as was originally thought, though it has certainly found favour with professional practices (accountants, solicitors, architects and so on) and with certain kinds of property and other investment vehicles. A LLP is relatively straightforward to incorporate and “bring to life”. You will need a LLP Agreement, which will set out the terms agreed between the members: contributing capital, sharing profits, running the business, retiring, competing, employing staff etc. This is the area where clients typically focus most of their time and start-up costs, even though we always hope that a well-negotiated LLP Agreement will never be required to be consulted – the mere fact of focusing minds on the issues covered will generally flush-out any problems or show-stoppers sooner rather then later.
What we are now seeing, however, is the development of what might be called “hybrid structures”. Many of our professional clients and contacts are reviewing, for example, their LLP structures, most notably from a tax perspective. The detail of tax planning is not for this article – you should consult your tax advisers – but we are being asked to advise on changes to LLP structures to replace individual members with “corporate” members. A sort of hybrid. What this does is allow LLP members to interpose another vehicle (perhaps owned by them and their spouse and even family members) which will enable them to “shelter” some of their LLP profits from tax by retaining them in the corporate member and then perhaps sharing them amongst family members who are shareholders. There may be commercial issues to consider as well, of course. The other members will need to be satisfied that they can enforce the terms of the LLP Agreement against the corporate member and that in market presentation terms it does not harm their brand, since the existence of a corporate member will be a matter of public record. There may also be regulatory issues if you are in a profession.
Again, these are complex issues and tax input from your specialist advisers will be required. This kind of development is interesting, however, demonstrating as it does that each “new” structure has its day, but is never immune to replacement or perhaps overlay with a hybrid. Before you know it, we’ll once again be a nation of sole traders.