Advice

By Catherine,

Are you a controller or a leader?

If you choose to lead a team rather than employ ‘hired hands’ your business is probably a partnership.

And if your business is a partnership that is set up as a limited company, you are probably missing out on some of the benefits of having a partnership structure, and the culture it promotes in supporting your growth.

We are big fans of partnerships. Indeed, we actively promote them for modern businesses. But what do we actually mean when we talk about partnership?

Here is one definition – A partnership is a relationship between individuals or businesses that is characterised by mutual cooperation and responsibility for the achievement of a common goal.

Shared ownership. Shared responsibility.

Partnerships are characterised by a leadership culture rather than the management control culture, which typically operates under an employment model. Partners are shown what to do rather than told what to do and they focus on outputs not inputs. Partners are more interested in pleasing customers / clients than pleasing their ‘boss’ and they are focused on profits and the success of the business rather than getting as much out of it for as little work as possible.

SweatshopIn the modern world most owner managed team based businesses are more naturally partnerships rather than employment models. And if you recognise these characteristics as true within your business, here are some of the other benefits that you could get from structuring as a partnership:

  • A more motivated team who manage themselves
  • Much more flexibility with shared ownership and profit sharing arrangements
  • Substantially increased financial robustness and efficiency
  • The opportunity to separately secure Intellectual Property Rights

However, if your business resembles the one in the photograph here, you probably aren’t a natural partnership.

The Government likes partnerships too.

In a speech on the economy last year, the Deputy Prime Minister said, “We need more individuals to have a real stake in their firms. More of a John Lewis economy, if you like. Firms owned by their staff often perform better, have lower absenteeism, less staff turnover, lower production costs; in general, higher productivity and higher wages”.

The successful retail business, John Lewis, is often held up as a shining example of a partnership model. It was founded on the principles of partnership ethos nearly one hundred years ago and now has over 75,000 partners who all share in the profits of the business every year. Interestingly, John Lewis does not use the partnership model as its legal structure since, until Limited Liability Partnerships were introduced in 2001, this would have exposed their partners to unlimited liability if the business got into difficulty. So, they have had to ‘artificially’ create a partnership model with the old employment model tools. Nowadays this is not necessary and an LLP structure makes sense for lots of reasons.

A word of warning, however: do not be tempted to ‘artificially’ create an employment model using an LLP just to save on Employers NICs! George Osborne in his March 2013 Budget announced plans to look into any such artificial arrangements. Notwithstanding the ‘official’ support for partnership and shared ownership structures, the Government is always on the look-out for perceived tax scams of any kind.

How to implement a partnership structure – talk to us.

We regularly set up structures that allow businesses to operate with limited liability while maintaining a partnership ethos. It is very important that the structure is commercially and legally robust and that:

  • Members have been invited to join and see it as a privilege and status enhancement.
  • Members are committed to the business and are not mere ‘hired hands’.
  • Members pay is based on business profits – a strong motivational catalyst to get all Members focused on profitability.
  • Regular communications with Members include information on financial and operational performance.
  • Proper, signed legal agreements are in place for all Members.
  • Appropriate measured protections are in place for new Members to ensure a smooth transition.
  • The commercial logic for the LLP business is clearly articulated and is supported by a legal agreement.

Under our licence model the LLP tests the potential for scalability through licensing IPR to third party operators. This is very common in the ‘corporate world’ and is a very effective way of achieving growth with low risk. This model structure also has the advantage of securing IP separately from the business of the LLP.

There are many reasons to review your business structure at various stages throughout the growth of your business. An LLP or partnership model is just one option available. The main point is that you have choices and changing your business structure need not be a hassle or a disruption on any level.

If you want to find out more about your business structure options or if you want to find out more about the benefits of LLPs, please contact one of the gang at OC. We are experts in understanding business strategies for growth, the tax and legal benefits and pitfalls of all business structures and the optimal structure at every stage of a business – from start-up to exit.

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  • Jennifer Raines

    The structure and the ethos together makes for a powerful play- but do business owners really want to share ont he whole,or do they see themsevles as being the “only ones” who can do the best job? And do team members really want the responsibility or do they only want the glory? Interested in everyone’s thoughts….