Should practice ownership structures break with tradition?

IN RECENT YEARS there has been a steady evolution in the ownership of many UK private companies.

Shareholders historically have mainly comprised a company’s founders, sometimes extended to family and occasionally outside investors. Ownership is now frequently also extended to key employees, with a small but growing number of companies creating share ownership plans for all their staff.

The government wishes to see employee share ownership grow significantly, believing it to be good for UK companies, citing research evidence and the success of employee-owned companies such as John Lewis.

It’s a business model that seems to work well for some companies, so could it be one that delivers benefits for accountancy practices, traditionally set up as professional partnerships?

Partnerships, by their nature, mean restricted ownership. More junior professional staff and non-accountants, executives and perhaps other employees are traditionally excluded from ownership but their business contribution may be critical to success. Keeping them on board and incentivised will be key.

A different approach to ownership could be worth considering more closely if resolving any of the following issues is important to your firm:

• Difficulties in securing long-term commitment from talented professionally qualified people;

• Reluctance or inability of those in line for partnership to invest in partnership capital;

• The need to recruit effective business managers who don’t have an accountancy qualification (for example, a CEO), in competition with companies outside the accountancy arena; and

• Enhancing long-term firm performance linked to improved staff commitment, efficiency and enthusiasm.

Extending ownership beyond partners will undoubtedly feel like a big step. Many firms may consider that their current ownership structure isn’t broken so doesn’t need fixing.  However, if the potential benefits outweigh the reduced personal ownership for current partners, the case begins to look strong.

Incorporation?
It is possible – in principle – to extend ownership through the traditional partnership or limited liability partnership (LLP) model. However, employees may be unwilling to take on unlimited liability, and becoming an LLP member may put at risk their statutory employment law rights. Although an LLP (or current hybrids) may be attractive to current owners from a tax point of view, a limited company will often be most suitable for a firm planning to widen its ownership.

Individual share ownership?
If ownership is to involve sharing in growth of capital value, then participating employees will most likely need to acquire personal ownership of shares.
However, if ownership is about sharing profit rather than capital growth, a more radical approach might involve part-ownership of the company by an employees’ trust. Both John Lewis and Arup, the international firm of consulting engineers, are trust owned.

Tax incentives?
No business ownership structure should be designed solely around tax incentives. A straight share purchase may often be the simplest route, however, if tax breaks are compatible with a firm’s preferred ownership structure, it makes sense to use them, to mitigate or even eliminate the cost to employees of becoming shareholders.

Here are two examples:
For a company wishing to extend ownership to selected key people, it might grant them approved Company Share Option Plan (CSOP) options, the tax due on any employee gains being capital gains tax (CGT) at a likely rate of 28%.

If they were to leave before their options had become exercisable, they would lose them, potentially creating an incentive to stay if share value rises after the option grant, and a reward once they are able to sell their shares.

For a company wishing to make all employees shareholders, the Share Incentive Plan (SIP) enables employees to buy or receive free shares, in each case with tax relief, significantly easing or even entirely removing the financial burden on employees.

Employees are given full relief against income tax and NI on any part of their salary used to buy shares in their company. Additionally, they can be given free shares, tax free, and every share they buy can be matched with up to two more free shares, also tax free. These are subject to annual financial limits and a number of conditions apply, including that the company must be independent, participation must be offered to all employees (or all who have worked for a minimum period) and the shares must normally be retained for five years, but can be forfeit if an employee leaves within the first three years.

Any subsequent growth in share value is exempt from CGT.

Employee share ownership is neither a cure-all nor a solution needed by every firm. However, a firm may find it interesting to consider if it needs to find new ways of securing commitment from key staff, improving long-term performance, maximizing engagement and creating a stronger link between profit and cost.

Robert Postlethwaite is managing director of Postlethwaite Solicitors