FP Issue 1

Form of Practice

Form of Practice
Before starting your own practice, it is crucial to choose the right business structure to suit your
new practice. You must decide what form of business entity to establish by considering how you
are taxed, legal liability, costs of the formation and operational costs. The choice of practice form
also determines which income tax return form you have to file.

Setting your final goals to your business organisation type is a crucial step, so understanding the
characteristics of each form is important. There are five general types of business form -
Sole Practitioner, Traditional Partnership, Limited Liability Company, Limited Liability
Partnership, and Employee Ownership.

Keywords

Form of Practice Practice-related Risk

Legal Structure Resource-related Risk
Sole Practitioner Project-related Risk
Traditional Partnership Unusual Risk
Limited Liability Company Shareholders
Limited Liability Partnership Members
Employee Ownership Partners
Companies House Collaboration
Agreement Flexibility
Liabilities Financial Management
Taxation Resource
Risk/Control Opportunity
Client-related Risk Profits

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Form of Practice

Test your knowledge...

As a qualified Architect working as a sole practitioner in practice; You are looking to grow
your practice. Recently you won a project situated in London where you will employ your
friend to help with the extra workload.

1. Which legal form of practice would you consider to grow your practice? and explain.

You are a qualified architect working in a large practice (a Limited Liability Company)
in London. Your friend won a new project; She asks you to leave your current job and
join her on the project for 2 years in the new practice. The practice has potential growth;
further resources would allow the practice to seek larger overseas projects. You are
considering her offer.

1. Explain your decision why would you set up the practice with such legal form.
2. Should the practice expand and grow beyond the new project, confirm whether you
would stay as the same legal form, or establish another form (please explain)

You are a qualified architect, working for a Sole Practitioner practice. Other employees
including a Year Out student. Your employer would like to grow the practice because of
the new project.

1. Set out and explain which aspects would help any decision to change the legal form
of the practice.
2. Based on the answer above, which legal form that you think would help further
expanding the practice. Please set out your answer addressing the aspirations and
issues faced.

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Things to think about when dealing with Form of Practice...

01 First understand the needs of the practice - Why, What, Who and When?
Then decide which form of practice that you would wish to set out.

02 In most common scenarios, if it is Sole Practitioner and looking for growth, it would
typically be a Limited Liability Company.

03 Another most common scenario, if it is a Traditional Partnership and looking for growth,
it would typically be a Limited Liability Partnership.

04 If it is a Limited Liability Company, and looking for an alternative form of practice, it

could be an Employee of Trust, or Limited Liability Partnership (but be careful when
choosing this, because you will need to provide your reason of choice).

Resources (Books / Articles / Online Publishing)

Architect’s Legal Pocket Book (2nd edition) Chapter 10 - Types of Practice

Handbook of Practice Management (9th Edition) Part 2 Practice Management -

Chapter 4.4.3 Form of Practice

https://www.gov.uk/set-up-sole-trader
https://www.gov.uk/set-up-business-partnership
https://www.gov.uk/limited-company-formation
https://www.gov.uk/guidance/set-up-and-run-a-limited-liability-partnership-llp
https://www.gov.uk/employee-ownership

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/210450/bis-13-949-moving-to-employee-ownership-
guidance-on-model-documentation.pdf
https://employeeownership.co.uk/wp-content/uploads/EO-guide-to-structuring-
employee-ownership1.pdf

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Form of Practices
There are five typical types of Forms of Practices:
1. Sole Practitioners
2. Traditional Partnership
3. Limited Liability Company (LLC)
4. Limited Liability Partnership (LLP)
5. Employee Ownership Trust (EOT)

General legal form decision factors

Collaboration
• Consider to run the business alone as a Sole Practitioner or collaborate with other practices /
individuals.
• Other benefits, such as having someone to bounce off ideas and assuming you have a number
of people to call on - broadening your own practice’s experience and capabilities by proxy.

Choosing names
• To get company name protected under Companies House (for LLC and LLP)
• Trade mark - A trade mark allows its owner to distinguish themselves from competitors or
others and, once registered, cannot be imitated. In the UK, trademarks are protected by law.

Risk / Control
• Client-Related Risks: Ensure background checks (i.e. with Dun & Bradstreet).
• Practice-Related Risks: Foresee Marketing and business development.
• Resource-Related Risks: Necessary skills and resources available to undertake the services
they are contracted to provide which the RIBA Code of Conduct requires. The number of
employees and internal management. Possibility to subcontract work to necessary resources/
skills and expertise/ to perform the role and appropriate level of PI Insurance. Form a better
internal structure and management.
• Project-Related Risks: Ensure careful planning and management on the medical focus project
and international project - understanding the country’s legislations. Purchase PI insurance to
cover any losses a client suffers due to the architect’s negligence and protect that practice.
• Unusual Risks: Force Majeure - i.e. Flooding, War, Pandemic.

Flexibility
• The form of practice affect in the growth in the company.
• Limited Companies provide easier access to bank overdraft or loan services credit as it is easier
to be ready if the practice wishes to expand further.
• Some forms of practice are recognised internationally (ie. LLP and LLC) for overseas projects,
hence the opportunity for international projects to balance out economies from different
countries, i.e. no effect by Brexit.

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Liability
• A separation between personal assets and the cooperation assets.
• If a joint and several liability should be introduced to limit the liability so parties are only
responsible for their share of the obligation.
•
Opportunity
• Must seek out clients or generate PR that will bring clients to the practice.
• Partnering up with others offer greater potential for new work through the pooling of client
contacts and greater opportunity to the practice (i.e. venture into different design sectors and
oversea projects)
• Sharing and developing design ideas.

Taxation process
• Consider how often should tax get paid per year.
• The payment for National Insurance.
• Consider the amount of admin time you have available to dedicate to these processes.
• Are there any assets owned by someone else that will be used in the business and how will we
ensure the business gets to use them in a tax efficient way?

Financial Management
• Advantageous to appoint its own financial adviser or external finance expert, this role could be
taken on by one of the partners/directors.
• Sole practitioners will have to take this role and responsibilities personally.
• New practice will require cash for its establishment costs (premises, equipment, licenses,
salaries, lease and other running costs. This cash can come from:
- Partners/directors own money
- Borrowings
- A bank overdraft
• A well developed business plan will be able to convince the bank to help with funding, this will
include short term and long term projections.
• Partners/directors need to be very aware of personal guarantees and to think carefully before
entering into them.
• A long term plan setting out ambitions and targets.
• An annual business plan budget setting out anticipated income, expenditure and profit. Once
set, this should not be altered but should be used as a benchmark to monitor against during
the year ahead.
• Shorter term, usually monthly but more frequently if circumstances demand, forecast of
income, expenditure and profit.
• A project based system for forecasting and monitoring resource needs and other project costs.
• Monthly management accounts reporting performance against budget and forecasts.
• A system of ledger and timesheets to record invoices issued, cash collect, time spent, supplier
invoices received, and other expenditure.
• Setting 5-10 Year plans can allow your practice to monitor development for potential growth
and improvement
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Form of Practice

Sole Practitioner
Key Legislation:
Companies Act 2006
Contracts (Rights of third parties) Act 1999

Collaboration
• Within a sole trader, you can practice as Sole Practitioner either alone or with employed staff.
A sole trader can trade as a limited company by working with a non-architect director. This will
limit liabilities.

Risk / Control
• Has the attraction of being free of running a business on their own, with absolute control.
However, the types of projects are limited to small projects.
• Although they will get all the financial rewards from being set up as a Sole Practitioner, they
would also have to manage all the risks alone. They are liable for debts and any damages
awarded against them for breach of contract or tort, and are liable for the full extent of their
personal and business assets. This can result in Bankruptcy. As a small business, sources of
finance may be more difficult to obtain compared to larger businesses. This form of practice is
generally high risk.

Management
• The Sole Practitioner can make immediate decisions because they do not have to consult with
other parties. The business belongs to one individual; thus, all profits belong to that person.

Liability
• If the business fails, all debts would have to be met by the Sole Practitioner’s personal assets.
The Sole Practitioner is 100% liable.

Flexibility
• The individual owner can elect to make any change they want without much cost. Operating
Flexibility: A Sole Practitioner is the most flexible as long as the business remains small. As well
as being the sole decision maker, a Sole Practitioner will generally be close to their customers.
They can therefore be sensitive to the needs of their clients, attuned to their needs and able to
react quickly and decisively to them.

Opportunity
• Sole Practitioner will be able to work directly with the client and gain a relationship with the
client which could ensure additional work.

Liability
• If the business fails, all debts would have to be met by the Sole Practitioner’s personal assets.
The Sole Practitioner is 100% liable.

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Taxation Process
• Sole Practitioner can not split business profits or losses with family members and you are
personally liable to pay tax on all the income from the business.
• The accounting process is much simpler for Sole Practitioner than for limited companies,
with no need for formal Annual Accounts or a Corporation Tax Return. Although you will still
need to maintain records of invoices and expenses, as a Sole Practitioner you must submit a
Personal Self-Assessment Tax Return, which will include details of profits from the trading
you have undertaken as a Sole Practitioner.

Advantages

Autonomy at work.

While anyone can inspect a limited company’s published accounts, a Sole Practitioners financial information is kept
private. That may mean that competitors have less information from which to see how you’re faring and identify
the secrets of your success.

Setting up as a Sole Practitioner remains the quickest and simplest way to get your business up and running. There
is no need to register the practice with Companies House, so no Companies House forms to complete. You still,
however, need to inform HMRC that you’re self-employed, operating your business as a Sole Practitioner.

As there is usually less of a need for professional advice when becoming self-employed as a Sole Practitioner, these
costs are at least reduced (if not eliminated entirely). There are also no fees to pay to Companies House when
setting up as a Sole Practitioner. You are also unlikely to need much capital to get the business going and operate it
in the early days. Although that very much depends on what type of work the business will do – in some industries,
the operating costs are high regardless of the legal form of the business.

There are a small number of formalities to set up and operate as a Sole Practitioner. This helps to keep costs down
and increase profits.

The business belongs to one individual; thus, all profits belong to that person.

Disadvantages

High Risk.

Difficult to keep up with changes in practice.

If the business fails, all debts would have to be met by the Sole Practitioner’s personal assets.

As a small business, sources of finance may be more difficult to obtain compared to larger businesses.

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Traditional Partnership
Key Legislation:
Partnership Act 1890

Collaboration
• A general partnership is defined by the Partnership Act 1890 as two or more people “trading
in common with a view to profit”. A general partnership provides a relatively simple way for
two or more people to own and manage a business together, each contributing capital, skills
and time. It’s usually possible for someone to be admitted as an additional partner after it
has been established. Unless the partners have agreed otherwise (generally via a partnership
agreement), the partnership will dissolve upon the resignation or death of a partner.

Risk / Control
• Each partner has extensive authority as an agent of the general partnership. When one of the
partners purports to act on behalf of the partnership, it will typically be bound by contracts they
enter into, even if the other partners have not agreed to them. At the same time, each partner
has a common law duty to act in the utmost good faith and fairness towards other partners,
to disclose relevant information to the other partners and to act towards the benefit of the
partnership as a whole.
• Compared to a limited company, the affairs of a partnership business can be kept confidential
by the partners.

Management
• Each partner will bring their own knowledge, skills, experience and contacts to the business,
potentially giving it a better chance of success than any of the partners trading individually.
• Partners can share out tasks, with each specialising in areas they’re best at and enjoy most.
So if one partner has a financial background, they could focus on maintaining the company
(account) books, while another may have previously worked extensively in sales and therefore
take ownership of that side of the business.

Liability
• In a general partnership, the partners are personally liable for business debts and obligations.
Creditors can claim a partner’s personal assets to meet any debts, so partners lack protection
if the business fails. In a partnership, each partner is jointly and severally liable for debts – so
each partner could end up being responsible for the whole of any debt, even if those debts
were taken on by others in the partnership or a partner who leaves. That’ll be most risky if
your ordinary partnership takes on debts and you’re in business with someone with few or no
personal assets.

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Flexibility
• In a partnership the business benefits from the unique perspective brought by each partner.
In business, very often two heads really are better than one, with the combined conclusion of
debating a situation far better than what each partner could have achieved individually.

Opportunity
• The more partners there are, the more money there may be available from their combined
resources to invest in the business, which can help to fuel growth. Together, their borrowing
capacity is also likely to be greater.

Taxation Process
• The business’s profits are shared between the partners, with each taxed individually on their
share of the profits and no separate tax liability falling on the partnership. The accounting
process is generally simpler for partnerships than for limited companies.
• The partnership business does not need to complete a Corporation Tax Return, but you’ll still
need to keep records of income and expenses. A partnership tax return must be submitted
to HMRC and each partner will need to file their own Self-Assessment Tax Return including
details of their profits from the partnership (as well as any other income).

Advantages

There are few formalities to set up and trade as a partnership.

The financial resources of more than one person are likely to be better than in a sole practitioner.

Responsibility can be shared.

There are good opportunities of expansion due to the availability of collective resources from all the partners.

There are good opportunities for pooling of equipment, accommodation and so on.
Employees share profits by bonuses.

Disadvantages

Partnerships have unlimited liability.

One troublesome partner could make it difficult for the other partners, because the action of one of the partners
makes the others liable.

Partnerships can be formed by intent and from behaviour between parties even when no formal deed of partner-
ship exists. Therefore, individuals sharing profits and facilities may not be aware that they are operating as a formal
partnership which can have legal consequences.

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Form of Practice

Limited Liability Company

Key Legislation:
Companies Act 2006

A limited liability company is a separate legal entity and can only be formed under the rules laid
down by the Companies Act 2006. The company is run by a board of directors who will carry
no personal liability for the actions of the company (‘the veil of incorporation’), and a company
will not be liable for the actions of a shareholder. However, all employees of a company owe a
duty of care to the company itself.

Collaboration
• LLC companies work by collaborating with all directors and staff in generating ideas and skills
contributions. For instance, the practice is working on a medical centre project which requires
expertise in the medical sector. Talents with expertise in a particular field (i.e. medical industry)
or experience with complex projects could be employed as directors under the limited company
to handle office projects and expand into different industries.
• Directors with overseas project experience could be employed to handle overseas regulatory
and language issues.
• There is no restriction of the number of directors or shareholders to LLC.

Choosing names
• By registering in the Companies House as LLC, the name of the company can be protected.
It is beneficial for the need for branding and marketing purposes when the practice grows its
business.
• Trademark - A trademark allows its owner to distinguish themselves from competitors or
others, and once registered, cannot be imitated. In the UK, trademarks are protected by law.

Management
• This form of practice should lead to an improvement in operational efficiency and cost-
effectiveness, compared with Sole Practitioner.

Liability
• LLC is a legal entity separate from its members (i.e. shareholders), where the liability of each
shareholder is limited to the nominal value of the member’s shareholding.
• There is a protection of personal assets.

Taxation process
• LLC is an efficient business structure because payment corporations tax on their profits of a
flat rate of 19%, along with directors national income tax taken against their salaries allowing
for minimised tax payments.
• LLC can leave some of its surplus income in its profit and loss reserves to use or withdraw at a
later date.

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Risk / Control
• Companies have to comply with the formalities laid down by the Companies Act, which relate
to all aspects of the company’s formation and operation. Management is, therefore, less
flexible than a Sole Practitioner (or Traditional Partnership), and there can be a considerable
administrative and financial burden.
• Client-related risks: ensure background checks with Dun & Bradstreet, to ensure healthy
payments on previous projects.
• Practice-related risks: due to the growth in the practice, it is best to strengthen the marketing
plan and business plan for the development.
• Resource-related risks: necessary skills and resources available to undertake the services
they are contracted to provide which the RIBA code of conduct requires (which would highly
recommend with a medical experience background if additional resources are needed for
the skills and expertise to suit the typology that the practice wishes to focus on.) The internal
management can be well structured to comply with the Companies Act which would benefit
the resourcing issues that are happening at the practice at the moment.
• The appropriate level of PI insurance for the practice and employee.
• Project-related: ensure careful planning and management on the project and international
project - understanding local country’s legislations. Purchase PI insurance to cover any losses a
client suffers due to the architect’s negligence which would aim to protect the practice.
• Unusual risks: Force Majeure - i.e. Coronavirus. The practice should create a business
contingency plan for any emergency happenings that would affect the practice’s cash flow.

Flexibility
• LLC provides easier access to bank overdraft or loan services credit as it is easier to be ready
if the practice wishes to expand further (i.e. running large scale projects which requires more
resources or spending.)
• LLC is recognised internationally for overseas projects, hence the opportunity for international
projects. This will help to balance out company profit and loss based on economies from
different countries, i.e. not affected by Brexit when the company has projects in Asian regions.
• LLC offers flexibility in resourcing. This allows the company to locate the resources needed for
other offices in different regions. (ie. Pandemic, London based office could continue to assist
work in a China based office, under situations of lockdown)
• Generally senior-level comprise of equity and non-equity directors (Non-shareholders).
Regarding this structure, it offers greater employee flexibility that allows young architects of
calibre to reach a higher ranking without the necessity of buying their way in. In addition within
an LLC practice, non-architectural employees of calibre are able to ‘enhance their status’ as well
rewarded directors. Remuneration could be increased if share options are available.

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Opportunity
• Partnering up with others offer greater potential for new work through the pooling of client
contacts and greater opportunity to the practice (i.e. venture into different design sectors and
oversea projects).
• LLC is an internationally recognised form of practice, therefore there is an opportunity to attract
new projects from other countries.
• Greater opportunity can come from registering VAT of a practice’s annual earnings. Only those
earning over £79,000 are required to do so, though doing so as a new practice would project
the image of a larger practice and potentially enable the ability to win larger work.

Financial Management
• The practice can be formed as a LLC which requires one director to manage and is based on
Shares.
• A benefit of this form of practice is that personal liabilities are excluded from the agreement.
• An LLC, given its form requiring directors as opposed to partners under Partnership, makes it
easier to hire a director who can take responsibility for finances. This will include things such
as:
- Cash collection
- Resource allocation and budgeting
- Short term and long term projections
- KPI (Key performance indicator)
- Invoicing
• LLC can be a financial burden complying with the formalities laid out in the companies act. A
company whose turnover exceeds a certain limit is required to have their audited accounts
published, compared to a Partnership where all financial accounts are confidential.
• LLC has a duty to provide shareholders with prescribed information, which can be a significant
extra cost.
• Ensure the practice is adequately covered by the right PI insurance. Going into a project without
it can open up to liability and cause significant extra cost.

Advantages

Protection of personal assets. Flexibility.

Tax advantages. No restriction in the number of members.

Disadvantages

There can be an administrative burden.

The company finances are in the public domain because annual accounts have to be filed at Companies House,
although abbreviated accounts can be filed in certain circumstances.

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Limited Liability Partnership

Key Legislation:
Limited Liability Partnership Act 2000
Limited Liability Partnerships Regulation 2001
Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009

A Limited Liability Partnership (LLP) is a legal structure for business, which can be contrasted
with forms such as the Sole Practitioner and LLC by shares. While partnership law does not
strictly apply to a limited liability partnership. The Limited Liability Partnerships Act 2000 in-
cludes various provisions which have their origins in the Partnership Act 1890.

Management
• A LLP can be set up between 2 or more individuals and each member can be a person
or a company. A LLP does not have shares or shareholders, but instead has members.
Further distinguishing an LLP from a limited company, there are no directors: like partners
in a traditional partnership, the members assume the dual responsibility of ownership and
management of the business. An LLP must have at least two members, who can be either
individuals or corporate entities. Therefore, at least two members from different corporations.
It is possible for someone to form an LLP on their own if a dormant company is appointed
as a corporate member alongside them. In legislation, there’s no maximum number of LLP
members.
• An LLP cannot appoint a company secretary, although at least two of its members need to
be identified as ‘designated members’. It’s typically these members who will take particular
responsibility for ongoing compliance, statutory record-keeping, and making required
submissions to Companies House. An LLP can enter into commercial contracts, hold property
in its own name and offer fixed or floating charges over its assets as security for loans.

Decision Making
• An LLP does not require to hold board meetings for decision making. The members of LLP can
determine their own preferred decision-making arrangements and other internal rules, which
can also remain private between them. These arrangements are often codified in a Limited
Liability Partnership Agreement, although the members will usually build in an element of
flexibility to change these rules if they want to do so.

Risk / Control
• The main restriction on the formation of LLP is that they can only be used for businesses
that intend to make a profit. That means it’s not possible to establish a LLP for non-profit,
philanthropic or charitable purposes. LLP must file accounts, a confirmation statement and
other event-based filings with Companies House, which can then be viewed by the public. If
you do not wish for your company to be within the public domain, this may be problematic and
cause risks to the practice’s aspiration.

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Liability
• LLP Is liable for its own debts, can sue and be sued. Members of LLPs carry joint, but not
several liability for the actions of the LLP, and so a member cannot lose more than they have
invested, unless fraud or some other form of wrongdoing is proven. In a LLP, the businesses’
profits are divided between the partners.

Flexibility
• Various businesses would in the past have operated as traditional partnerships, but an
increasing proportion are now set up as LLP and many existing partnerships have refashioned
their business in the LLP structure.
• Profit Arrangement: LLP have the flexibility to vary the distribution of profits between individual
members, a different percentage of profits could be paid to different members in different
years. This would also be agreed on a Limited Liability Partnership Agreement.

Opportunity
• LLPs benefit from the unique perspective brought by each partner.
• Compared to a partnership, LLP gives the advantage of not being personally liable.
• It is quite easy to go from partnership to LLP.

Taxation Process
• LLPs are treated in the same way as Traditional Partnerships in that income is taxed in the
year that it is apportioned to the members. Members are therefore effectively treated as self-
employed insofar as tax is concerned.
• (Similar to the point above) LLP are taxed like partners in a traditional partnership, personally
paying income tax, National Insurance and capital gains tax on their own share of profits.
Typically, LLP’s members will need to register on HMRC individually as self-employed and then
complete a Self-Assessment Tax Return on an annual basis, paying any tax by the appropriate
due dates.

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Advantages

The LLP is liable for its debts and its other obligations, but its members are not liable for the debt of the partnership.

There are no restrictions on the number of members and LLP may have.

Registration with Companies House protects the company name by law and prevents anyone else trading with the
same name.

The death or resignation of a director does not affect the structure of the company, it can continue to trade as
before.

Members can choose to become a salary partner to have a stable salary rather than shares.

Disadvantages

There can be an administrative burden

There can be a complex and costly start-up procedure.

Accounts must be prepared in accordance with accounting standards which must be audited.

If the turnover of the company is more than £350k, company accounts need to be submitted every year. This can
be costly as accountants and auditors are required.

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Employee Ownership
Key Legislation:
Finance Act 2014

Employee Ownership is an effective ownership model. It has seen unprecedented growth in recent
years in the architecture sector and has become increasingly aware of the positive effects and the
advantages it brings.

Employee Ownership has the potential to deliver significant benefits for the organisations which
employ it and when implemented well. It is evidenced to deliver improved profitability, productivity
and innovation.

The Employee Ownership Trust (EOT) was introduced in the Finance Act 2014 as part of the coa-
lition government’s aim of promoting employee ownership as a business model in the UK. An EOT
is a method of share ownership whereby employees hold a controlling stake in the company for
whom they work, via a trust.

An EOT is similar to an employee benefit trust (a trust set up to provide benefits to employees in
the form of shares or share options), with additional tax advantages. An EOT can hold anything
from 51% to 100% of the company’s shares, and the trust must benefit all the employees on an
equal basis.

The EOT model is one which provides every qualifying employee with the same rights and benefits
without the obligation to purchase shares directly from their own funds. It does not prevent the
receipt of direct monetary reward for corporate or personal success through mechanisms such as
bonus payments.

Buying shares from employees participating in an employee share scheme who wish to sell their
shares (or have to because they are leaving their company)

What does employee ownership mean?

• A company can be treated as “employee-owned” where the whole, or a majority, or a significant
part of it is owned by, or on behalf of, its employees. (ie. John Lewis, Waitrose)
• Employee ownership can be direct (by means of shares held by employees individually) or
indirect (by means of a trust arrangement) or hybrid including elements of both varieties.

Why consider employee ownership?

• Employee-owned companies tend to outperform other companies on a number of measures,
potentially also enjoying more committed staff members, greater innovation and a more
entrepreneurial culture.
• The-Ownership-Dividend reports on the UK’s employee ownership sector, firms in which
employees own a substantial stake, and have a meaningful voice, in the business.

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Employee ownership a succession planning solution

• Establishing an employee ownership trust to buy out retiring owners is increasingly popular.
• Not only does it often solve the kinds of succession problems that many owners face, it creates
a strong platform for continued success and growth through having engaged and motivated
new owners and brings statutory tax relief for both retiring owners and employees.

What kind of employee ownership would work best for your company
There are three main forms of employee ownership:

1. Individual Share Ownership

A majority or significant part of the company is to be owned by its employees individually.
This will involve your employees acquiring shares personally (and being issued with a share
certificate as evidence of their holding), so that they have direct ownership of part of the
company.

Although trust ownership is simpler to set up and operate than individual share ownership,
you may prefer the latter if, for example, you place a high value on personal investment
by employees or the prospect of employees benefiting from capital growth if the company
performs well.

There are two tax-advantaged employee share schemes which can make it significantly easier
financially for employees to acquire shares in their company, for example SIP and SAYE.

2. Trust Ownership
In some employee-owned businesses, the ownership is indirect through an employee trust
which owns all or most of the shares on behalf of employees as a whole, with no single
employee ever holding shares personally. This is how companies like John Lewis and Arup
have structured their employee ownership.

This form of ownership has the advantage of simplicity, as it avoids the need to transfer shares
to new employees and buy them back from leavers or employees who simply wish to sell.
Rather than being paid out to shareholders as dividends, profits can be shared with employees
by way of bonuses. If the trust is a statutory employee ownership trust which owns a majority
of the company, bonuses can be paid income tax free.

3. Hybrid Employee Ownership (A combination of trust and individual ownership)

Employees will be enabled to acquire shares individually, but an employee trust will always
maintain a minimum level of ownership. This approach is often chosen by companies which
see strong advantages in employees holding shares personally, but which also see value in
having a strategic shareholding held by a single shareholder. It can also have the advantage of
reducing the number of shares in circulation and so minimising the potential need in the future
to fund the repurchase of shares from employees wishing to sell.
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Form of Practice

Individual Share Ownership Trust Ownership Hybrid Ownership

Capital growth important
Capital growth not an objective
Trust ownership is preferred but
you want some individual share
ownership to provide:
a modest degree of capital growth
and/or a direct feeling of owner-
ship.

Low staff turnover Higher staff turnover You want to limit the total number
of shares in circulation, as this lim-
its any need for the company to
help pay for share buybacks from
employees who wish to sell their
shares (or are required to because
they leave).

Smaller employee numbers Larger employee numbers

Employees likely to consider personal Long term investment/ownership

share ownership more real than trust is important
ownership

Tax breaks for individual share own- Desire to prevent (or make difficult)
ership make it more attractive and a takeover
affordable

Employees may have difficulty fund-

ing share acquisition

Limited funds to buy back employees’

shares

If bonuses/performance-based
rewards are important, the company
is happy for these to be cash-based
rather than involving shares

Where the terms and level of the

trust’s ownership allow it, the ability to
pay bonuses free of income tax may
be an added attraction

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Form of Practice

Advantages

Employee ownership has a genuine sense of ownership and entitlement, creating an egalitarian working environ-
ment with a united sense of purpose and commitment. As a result, it is able to attract and retain the very best
talent to enable it to compete successfully in its chosen markets.

This form of practice replaced the traditional “master/servant” relationship by a corporate model of working, where
employees use their front line experience and customer knowledge to influence product development and business
strategy. It is this collaborative working, combined with a financial investment in the business, that drives perfor-
mance.

The key condition under EOT is recognised to succeed best is when it allows employee-owners to exercise their
voice internally. It is this combination of share ownership and employee engagement that drives higher perfor-
mance.

The culture in the practice maintains openness and staff participation within the organisation by giving employees
a long term stake and involvement in the business. This would unlock outstanding productivity, innovation and
financial results for the company.

Tax-efficient for the selling shareholders and the employees in terms of Capital Gain Tax, inheritance and income
tax relief. Where a company’s shareholders sell a controlling interest to an EOT, any gains they make will be exempt-
ed from capital gains tax. Employees are entitled to receive an annual bonus of up to £3,600 free of income tax,
provided that all employees are entitled to receive bonuses on the same terms.

Not all shareholders need to sell to the EOT.

Sickness and absenteeism tend to be less in EOT-owned companies.

Business performance and productivity improves when companies become EOT-owed.

The existing management team of the company can remain in place after a sale to an EOT.

Disadvantages

When selling shares to an EOT, it’s necessary to obtain a market valuation of the company, so the sale price can
be agreed. It’s important not to overvalue the company, as the purchase price will need to be paid by the company
itself, potentially being a drag on profits in the future.

The selling shareholders will be paid over time as opposed to the cash they would receive in a market sale.

If the company’s performance declines after-sale to an EOT, then repaying the funding used to buy the shares can
be problematic. Alternatively, the selling shareholders can miss out on an increase in the value of their shares if
performance improves after-sale to an EOT.

The trust is controlled by trustees, and it’s important to choose these individuals carefully as they will be significant
figures in the business.

If any ‘disqualifying events’ occur in the second tax year of operation of an EOT (the company ceasing trading, the
EOT failing to meet the qualifying rules for example), then the selling shareholders will be liable to Capital Gain Tax.

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 FP Issue 1

Form of Practice

Difference Between LLC and LLP

Both LLC and LLP have the characteristics of corporations and partnerships. The differences
between the two business structures include management requirements, liability protections,
liability insurance obligations and tax benefits.

One significant difference between LLP and LLC is that LLP must have a managing partner that is
liable for the actions of the partnership.

Management Structures
• LLC shareholders can manage the business themselves. Or else, all shareholders can appoint
one of the shareholders or use a “manager management” to manage the business. Manager
management would only manage the business and not be involved in the business decisions.
• LLP forms like the traditional business partnership. The management responsibilities are
equally split between partners. A partnership agreement should be written.

Limited Liability Protection

• LLC are protected from personal liability for business debts and claims. However, if a
shareholder has committed an act that is legally actionable, other shareholders can be held
liable.
• Each partner in an LLP is personally liable only for their own negligence.

Tax Process
• LLC would need to pay corporation tax and capital gains tax on their taxable income.

Profit Arrangement
• The reason for choosing LLP over LLC would be due to its restrictions imposed by their
professional associations or want to benefit from the specific advantages of LLP status.
Businesses would in the past have operated as traditional partnerships, but an increasing
proportion are now set up as LLP and refashioned their business in the LLP structure.

Copyright © Part3Plus P. 20

Form of Practice
Comparison between Traditional Partnership, LLP and LLC.
Traditional Partnership
Owners • Owned by the partners.
(Who and • Must be at least two in order
how many?) to satisfy the definition of a
partnership.
Managers • Managed by the partners.
(Who and Must be at least two.
how many? • Every partner may take part
in the management of the
Partnership.
• Therefore there must be at
least two at all times.
Liability • Unlimited liability.
(Who and for • In the event of winding up
how much?) the partner’s private assets
may be used to pay off any
partnership debts.
• Partners are jointly and
severally liable for debts.
Copyright © Part3Plus
LLP
• Owned by the members.
• Must have at least two
members at all times.
• However the LLP continues
to exist even if membership
falls to one due to the
LLP having separate legal
personality.
• Managed by the members.
Must be at least two.
• Every member may take part
in the management of the
LLP
• Freedom to create any
management structure they
choose – no Model Articles
equivalence.
• Limited Liability.
• Losses are losses of the
LLP and thus the member’s
liability will be limited to:
- His capital contribution
- Any unpaid profits.
- Any unpaid loans he has
made to the LLP.
• Unless LLP agreement
specifies a greater sum).
FP Issue 1
LLC
• Owned by the shareholders.
• Must be at least one
shareholder.
• Managed by the directors.
• Must have at least one.
• Must have at least one
director who is a natural
person.
• Shareholders have limited
liability.
• The extent of their liability is
limited to either:
- If the company is “limited by
shares” - The amount of any
unpaid share capital.
- If the company is “limited
by guarantee” – the amount
the members have agreed
to contribute to the assets in
the event it is wound up.
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Form of Practice
Traditional Partnership
Decision- • By majority.
Making • However unanimous consent
of all partners is required to:
- Change the nature of the
partnership.
- Introduce a new partner.
• Could be varied by
partnership agreement.
Ownership of • “Partnership assets” are
Property and owned by all of the partners
Other Assets jointly.
• Partners share equally in the
capital of the business.
• Can therefore be useful to
specify in the partnership
agreement any assets
intended to remain the
property of individual
partners.
Constitution • Partnership Agreement (PA)
(What is it?) • The PA 1890 implies
numerous terms if there is no
Partnership Agreement or the
Agreement does not cover
the subject matter of the Act.
Copyright © Part3Plus
LLP
• By majority.
• Ordinary matters to be
decided by a majority.
• However unanimous
consent of all members is
required to:
- Change the nature of the
LLP.
- Introduce a new member.
• Can be varied by LLP
agreement.
• Owned by the LLP –
separate legal personality.
• LLP Agreement
• Section 7 of the LLP Regs
2001 applies a number
of “Default Rules” in the
event that there is no LLP
Agreement or the Agreement
does not cover the subject
matter of the Act.
FP Issue 1
LLC
• Day-to-day decisions taken by
the directors.
• Directors decisions are to
be taken by a majority or
unanimously, normally by way
of a vote at a board meeting.
• However, certain decisions
must be taken by or approved
by the shareholders.
• Only shareholders can decide
to:
- Amend the company
articles.
- Change the company name
– either or
- Remove a director
- Appointment
- Buy-back of shares – which
procedure would be being
used.
• Shareholders must approve a
director’s decision to:
- Enter into an Substantial
Property Transactions.
- Loan money to a director).
- Grant a director a service
contract longer than 2 years.
• Company assets belong to the
company as a consequence
of it being a separate legal
person – Saloman v Saloman
[1897] AC 22.
• The Company Articles
- Model Articles if no
amended articles.
- Amended Model Articles/
Special Articles
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Form of Practice
Traditional Partnership LLP
Accounts • No. • Yes
(Are they • Designated members have
produced, a responsibility to sign and
audited and file annual accounts with the
published?) Registrar.
• Exemptions for small and
medium LLP’s – abbreviated
accounts.
• The accounts and member’s
reports must also be filed
at Companies House
each financial year though
“small” and “medium-
sized” companies may file
abbreviated versions.
Publicity of • Must put names and • Must file accounts.
Information addresses on stationery. • However, the Members
• Any place of businesses Agreement does not need to
be publicly filed.
• All of the records filed at
Companies House will be
available for inspection
Incorporation • None • Must be registered at
Formalities Companies House.
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FP Issue 1
LLC
• Yes
• A company must keep
adequate accounting records.
• Directors have responsibility
to ensure full accounts are
produced for each financial
year.
• The company must prepare a
director’s report to accompany
the accounts.
• The accounts, directors’
report and auditors’ report
must be circulated to every
shareholder.
• The accounts and directors’
report must also be filed
at Companies House
each financial year though
“small” and “medium-
sized” companies may file
abbreviated versions.
• All records at Companies
House are to be made
available for inspection e.g.
various forms, company
articles e.g. IN01 etc.
• Directors must file:
- Accounts.
- Directors Report.
• May choose to have certain
registers publicly available at
Companies House:
- Register of Directors
- Register of Directors’
Residential Addresses
- Register of Members
- PSC Register
• Must be registered at
Companies House.
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Form of Practice
Traditional Partnership
Duties • Duty of utmost good faith to
imposed on the other partners.
managers by • Partners must divulge
the law all relevant information
connected with the business
and their relationship to it.
• Partners must account for
any benefit derived without
the consent of the other
partners.
• Partners must account for
any profits made from a
business of the same nature
which competes with the
firm, unless the other partners
consent to this.
Copyright © Part3Plus
LLP
• Same as a partnership.
• Duty of utmost good faith
to the LLP – not clear if
members owe that duty to
each other.
• Members must divulge
all relevant information
connected with the business
and their relationship to it.
• Partners must account for
any benefit derived without
the consent of the other
partner.
• Partners must account
for any profits made from
a business of the same
nature which competes with
the firm, unless the other
partners consent to this.
FP Issue 1
LLC
• Duty to Act Within Powers
- Directors must act in
accordance with the
company’s constitution and
only exercise powers for the
purposes for which they are
conferred.
• Duty to Promote the Success
of the Company
- Must act in a way which
he considers, in good faith,
“promotes the success of the
company for the benefit of its
members as a whole”
• Duty to Exercise Independent
Judgment
- ie. Directors must not
contract out their decision-
making or are subject to
undue influence.
• Duty to Exercise Reasonable
Care, Skill and Diligence
- Subjective and objective
limbs.
- ie. Standard of a reasonable
director, and standard that
director has; i.e. director can
be held to a higher subjective
standard.
• Duty to Avoid Conflicts of
Interest
- A director must avoid a
situation in which he has, or
can have, a direct or indirect
interest that conflicts, or
possibly may conflict, with
the interests of the company.
- Other directors can
authorise.
• Duty Not to Accept Benefits
from Third Parties
- A director must not accept
a benefit from a third party
conferred by reason of— (a)
his being a director, or (b) his
doing (or not doing) anything
as director”. This would cover
corporate hospitality.
• Duty in event of insolvency
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Form of Practice

Traditional Partnership LLP LLC

Termination • Partnerships may be • Much the same as a • Solvent company can be
dissolved by: company: LLP has a ended by:
- Written notice of one of the separate existence from its - Members applying to strike
partners (if the partnership members so will not dissolve off the company from the
agreement allows for this automatically if, for example, register if it hasn’t traded
or if there is no agreement the membership falls below a in the last 3 months, isn’t
and the partnership is a certain number. threatened with liquidation
partnership at will). • Instead, positive steps must and has no agreements with
- Expiry of a fixed term. be taken to terminate an LLP. creditors.
- Death or bankruptcy of one The routes to termination are - Member’s voluntary
of the partners. striking off by the Registrar liquidation - Directors must
- Illegality or winding up (voluntarily or swear a statutory declaration
- By court order. compulsorily). of solvency and face a fine or
- Where an individual partner • Can be wound up under the imprisonment if they do not
has a private debt charged insolvency act. have reasonable grounds for
against partnership assets, doing so.
the other partners may • Alternatively if the company is
serve notice to dissolve the in financial difficulties it may be
partner. ended by:
- Compulsory liquidation
following a petition by the
companies’ creditors.
- Creditor’s voluntary
liquidation – usually occurs
in response to creditor
pressure where the directors
are otherwise unwilling to put
the company into liquidation.

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