Adviser: Testing the waters on LLP

Since Ernst & Young became the first firm to adopt the structure of a limited liability partnership in 2001, many others have followed suit – including a significant percentage of the top 50 practices. But what of the small and medium-sized firms in the independent sector?

Becoming an LLP offers the benefits of limited liability, while allowing the ‘members’ to retain their traditional internal structure as a partnership. There are considerable tax advantages, but the LLP structure will not protect individual members from personal liability for wrongful or negligent acts or omissions. As there is no model constitution for LLPs, members fall back on very limited default positions. It is therefore essential that a ‘members’ agreement’ is prepared by a lawyer to cover the potentially contentious issues that can arise between the members of an LLP.

One of the prime motivators for adopting an LLP structure is the ability to attract outside investment to fund development, rather than relying on the partners personally or the bank. This means that firms can fast-track their development to keep pace with client demands and compete effectively.

Of course, the accounts of an LLP are available for anyone to read and there are elements of disclosure of members’ interests. This allows the public the protection of knowing to what extent the members’ confidence in their enterprise is matched by their willingness to invest their own funds.

It also reveals the company’s profits and the income of members – information that some firms are extremely reluctant to reveal.

Despite the fact that practitioners spend considerable time and expertise enhancing their clients’ profits, they don’t want those clients to know just how much money they are making. The crucial question is: ‘Do our clients believe they are getting value for money?’

If the answer is yes, then profit levels will not be of concern to them. Indeed, entrusting their business to a successful practice may well boost their confidence.

Many smaller practices are facing serious succession problems, one of which is their inability to attract high-calibre individuals into the partnership. Becoming an LLP will make the firm considerably more attractive to potential partners, as incoming members of an LLP are not responsible for practice debts or financial liabilities that were sustained before their arrival.

Firms looking to build value into the practice, perhaps with an eye to a future sale, should look at their structure, as there is also the alternative of incorporating only some aspects of the business, in particular corporate finance, financial services or bureau services, that can then be sold off separately.

It is not only larger firms that can become LLPs. Two partner practices can convert provided each partner is earning a minimum of £50,000 pa and there are no outside shareholders. In the next few years we will undoubtedly see a sharp increase in the number of LLPs.

Phil Shohet and Andrew Jenner are directors of Kato Consultancy.

Related reading