When starting a business the designer has traditionally had a choice between working as a sole trader (or a partnership) or forming a company. But since April this year, that has changed.
The choice was fairly simple. You could have chosen to have the company as the legal entity with limited liability, to be governed by a multitude of legal controls and to make your accounts public. On the other hand, you could have opted for the sole trader/ partnership, which is far more flexible and private, but which does not have limited liability (whereby shareholders are liable for company debts only to the value of their shares).
There are certain exceptions where a company could keep its affairs private (an unlimited company) or where certain members of a partnership could have limited liability (a limited partnership). But, in practice, the laws were such that it often came down to a trade-off between privacy or limited liability.
Of course, the taxation of the company was also very different to that of a sole trader/ partnership. While many small businesses would have welcomed limited liability, and put up with the financial disclosure requirements, the prospect of losing self-employed status and becoming an employee of your own company, with the obvious tax consequences, was often a bridge too far.
The result was many small design groups, that do not need the imposed structure of a company, have continued to trade as sole traders/ partnerships. As such, they are personally exposed to significant commercial risks and have had to look closely at their contractual obligations. They must also ensure they have appropriate insurances to cover professional indemnity claims.
From 6 April, a new kind of legal entity has been available for businesses between two or more persons. It is called the Limited Liability Partnership and combines some of the flexibility of the old partnership structure, allowing individual partners to remain self-employed, but offers limited liability. Currently less than 200 LLPs have been registered.
Unlike old partnerships, an LLP is a legal entity that will be able to enter into contracts. This is distinct from old-style partnerships where third parties contract with each partner. An LLP will be taxed as a partnership so the individual members will retain self-employed status and be taxed on their share of partnership income.
An LLP will regulate its own affairs and management in much the same way as a partnership, with the “members” falling into two groups, the second consisting of at least two persons called designated members who are similar to directors of a company and who are responsible for the management of the LLP. A formal agreement between the members is advisable to record profits/ loss sharing, management and so on, but this is not made public. If you do not have an agreement then the law provides by default the basic framework for the LLP. Furthermore, like a registered company, an LLP can grant a floating charge over its assets, which may assist the raising of finance.
An LLP has to file documentation similar to a registered company including: members particulars (including residential addresses), accounts (generally audited, but there are exemptions for small companies), an annual return (with a £35 fee), a registered office, and mortgages and charges. It is highly regulated, though the actual management is left to the agreement of members. The remuneration of the highest paid members has to be disclosed in the accounts and will, therefore, be available on the public register.
An LLP is registered in much the same way as a company and a registrar must approve the preferred name by checking it against the LLP and index.
Costs include the registration fee of £95 and the cost of employing an incorporation agent, who will prepare the papers for signing, deal with all of the filing formalities, provide a basic LLP agreement and cover the filing fee for an inclusive figure in the region of £400 plus VAT. At the moment, application papers submitted to Companies House are being processed in a few days.
In practice, LLPs will be formed to either cover new consultancy relationships or will arise from the transfer of the consultancy from an old-style partnership to a new LLP. In the latter case, care will need to be taken to ensure that all of the business assets and liabilities are transferred to the LLP.
Professional advice will be needed to ensure that the transfer of assets to the LLP does not give rise to tax or stamp duty liabilities, and to check that the transfer is that of a business as a going concern to avoid VAT liability.
The LLP is not a perfect vehicle, but few businesses actually suffer from the imposition of structured management. If designers can cope with the rigid structure of the LLP and can endure the public disclosure required, then this could be a valuable vehicle for the design consultancy partnership, whose partners wish to retain their self-employed status but who are looking for limited liability.
Darrell Stuart-Smith is a partner of Humphries Kirk Solicitors