Best practice: Limited liability partnerships
Should your practice become an LLP? At TP Bennett, we’re glad we did, writes Trevor Gale
A recent survey by law firm Mishcon de Reya found that 90 per cent of service-based businesses had never considered changing the legal structure of their company. Of those that had, 64 per cent had not thought of a limited liability partnership (LLP) as an option, and 10 per cent admitted that they had never heard of an LLP structure. And yet all the LLP businesses surveyed stated that they were very happy with their LLP structure and reaped significant rewards as a result. So the question is: would an LLP structure be appropriate for your practice?
LLPs have existed in the UK since 2000, and are defined as a partnership in which some or all partners have limited liability: ie one partner is not responsible for another partner’s misconduct or negligence. LLPs were designed to promote the growth of partnerships by providing limited liability and a separate legal identity, while maintaining the tax treatment received by partnerships. They also have other key benefits, such as sense of ownership in the business and flexibility in management and pay structures.
Our practice, TP Bennett, was a partnership for 84 years before becoming an LLP in 2005. The main driver for the change was the ability to grow the ownership of the practice in a structured way, and to create the opportunity for individuals to take the initiative – to lead new areas of growth, and be rewarded accordingly. This has allowed us to engender a sense of ownership among the senior management team, and to foster a performance-based compensation approach instead of just salaries, bonuses and fixed tiers of management.
The inclusive approach of having business ownership in the hands of 45 people instead of seven has brought positive results. Moving to an LLP has removed the perceived glass ceiling of the previous management structure, allowing individuals to excel and to be rewarded in proportion to their efforts, achievements and contribution to the profit of the practice. It has increased engagement between senior staff, improved levels of debate internally and has more evenly spread the responsibility for running the practice and budget holding. Overall the response has been very favourable.
Since 2005, TP Bennett’s LLP membership has grown from 28 to 45. New members are voted in by the existing ones based on their individual contribution to the practice; this ensures that their inclusion does not cause share dilution without an overall increase to the practice’s reputation, turnover and profit. The original seven partners (now principal directors) retain the majority of the share ownership and profit pool, but in return carry all the risk by guaranteeing a minimum annual drawdown for the remaining members. During the last couple of years we have still produced a distributable profit, which is undoubtedly a direct consequence and reflection of our staff’s commitment, as well as the practice’s ownership and responsibility structure.
The members became self-employed (essentially shareholders) when we became an LLP. This was a culture shock for some, and the overlap tax situation in the first year was provided for by the practice to smooth the transition. Collating the necessary paperwork for 45 members’ tax returns each year is now much more of a struggle for our accounts team than it was previously, but it is becoming more streamlined each year.
Our accountants advised and encouraged us to become an LLP. We sought advice from several sources (both inside and outside our industry) who had already switched to an LLP, before deciding to adopt it for ourselves. Before becoming an LLP, I thought the structure was primarily for large law or accountancy firms, particularly as it is not always clear how it translates to a smaller practice (TP Bennett employs 160 people in the UK). Often the smaller the company, the flatter the management structure, which can lead to a ‘them and us’ culture, with a small number of ‘haves’ and a majority of ‘have nots’.
Looking beyond this, understanding the benefits of collective ownership and responsibility, and giving direct rewards for performance are the keys to successfully becoming an LLP. It requires vision from the top to see the potential to grow the practice by empowering management, and by supporting people with drive and passion. In turn, this enables personal growth and reward in a more gradual and proportional way than the big leaps of step promotions or by entering the elite tier of a traditional partnership.
Trevor Gale is a director at TP Bennett