Practice Management - 06 Forms of Practice

6.         Forms of Practice

Sole Trader:

Advantages:

·       Freedom to carry on a business on their own, in tune with their own talents with total control

·       Easy to set up

·       No Legal Structure

·       Entitled to all profits but must face risks alone

Disadvantages

·       Taxed on profit

·       Responsible for debts and any damages awarded against them and are liable to the full extent of their personal and business assets

·       No distinction between the person and the business

Mitigating Risk:

·       A way of mitigating this risk would be to work with a non-architect co-director and trade as a limited company to limit these liabilities.

Partnership:

·       In the traditional form a partnership is simply a relationship between two or more people carrying on a business in common with a view of profit.  This form has the advantage of not having to be registered at Companies’ house with no requirement to disclose its accounts public.  The partners are jointly and severally liable and must share in both the profit and the risk.  There is no separation between individuals and business and you remain liable even after you leave the partnership – need to maintain PII.

·       Best practice to establish relationship by formal deed of partnership which should set out the rights and responsibilities of the partners.

·       The key advantage of this form of practice over a sole trader lie in the profit sharing, the greater potential for new work through the pooling of client contacts and the security a partnership offers to a client

A way of mitigating these obvious liability risks is to form the practice as a limited liability Partnership (LLP)

Limited Liability Partnership

·       A LLP is governed by the limited liability partnership act 2000 and combines some of the characteristics of a company and partnership.

·       Through this Act the partnership can be registered as a LLP at companies house (and publically disclose accounts) creating a separate legal entity from its members, which limits the liability of its members to their stake in the partnership. 

·       The major advantage over a LLC is that the firm is treated like a partnership for the purposed of income and capital gains tax and has complete freedom for internal organisation.

·       Disadvantage - Trading in partnership name – issues with succession

Private Limited Liability Company

·       The creation of a LLC is governed by the Companies Act 2006 and requires the appointment of a director, registration at Companies House and public disclosure of Accounts.

·       The major advantage of the creation of a limited liability company is that it is an entity separate from its members and the liability of each shareholder is limited to the value of there shareholdings.

·       Larger administrative requirement as Articles of Association, Directors Agreement and Shareholders Agreement must be defined and filed with the registrar of Companies

·       VAT registered is earning over £79,000

·       Although under this form of practice the directors are protected from personal liability for the company’s debts, they continue to have a duty of care to act in the companies best interests.

Advantages over a partnership:

·       Directors are not normally personally liable for the debts of the company

·       It is easier for a company than a partnership to raise outside finance, as security can more readily be created over the assets of the company

·       Taxation position is relatively simple, and overall taxation can be lower than for a partnership.

·       All salaries, including those of the director, are deductible before calculation of profit for corporation tax purposes.

·       Succession - An interest in the company may be given more readily than in a partnership.

·       It is easier to remove an unsatisfactory director than an unsatisfactory partner.

·       Companies are internationally recognised therefore it may be easier to develop business relations overseas.

Disadvantages over partnership:

·       Companies have to comply with the formalities laid down by the companies Act.  Management is therefore less flexible than with a partnership with additional administrative burden.

·       Companies whose turnover exceeds a certain limit are required to have their audited account published whereas a partnership is able to keep its financial affairs confidential

Succession

Sole Trader:

·       Cease Business

·       Sell On

·       Merger into a Partnership

·       Convert to a Limited Company

Partnership:

·       Cease the business – still liable

·       Change partners – still liable

·       Convert to Limited Company

Limited Liability Company:

·       Trading through a limited company has the advantage that shares in the company can be transferred to other members.

·       Directors Resign or appointed

·       Could be set out in the terms of a shareholders agreement

Limited Partnership

·       Must be registered under the limited partnership Act 1907.  In this form of practice one or more of the partners must agree to be responsible for all the liabilities of the practice.  Other partners can contribute capital to the partnership, but their liability is limited to the proportion of capital they contribute.  Only advantage is that this enables the taking on of partners who would otherwise be unwilling to contribute owing to the liability.

Things to consider when forming a practice

·       Amount of capital available to invest and ability to raise capital – bank may see partnership as a safer investment.  Share profit and risk.

·       What is your Potential Market Sector

·       What is your business plan and your unique selling point – skills and assets

·       Where you see your place in the market

·       Who are your potential clients and how do you propose finding them – marketing strategy

·       Goals for the future growth of the practice and succession

SWOT Analysis

·       SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for identifying both the Opportunities open to you and the Threats you face.

·       Used in a business context, it helps you carve a sustainable niche in your market.

Strengths

·       Respected founders with good contacts

·       Talented staff with good mix of skills

·       Good internal culture and mutual respect

·       Good location and offices

Weakness

·       High stat up costs

·       Low profit level

·       Lack of significant built projects

·       Limited sector spread

·       Unrecognised name / brand

Opportunities

·       New government pledge to invest in cultural projects

·       Join together to increase client base

·       Bring in specialised knowledge inhouse

Threats

·       Strong competition from established firms

·       High business tax rates

·       Related attitude to business best practice and financial procedures