Are you using the right business structure?
First published in Independent Practitioner Today in February 2023.
Doctors’ accountants have regularly reported in Independent Practitioner Today about the main types of business structures for your practice and the key differences between them. Now solicitor Kirsty Odell gives a legal viewpoint.
Many businesses are now choosing to operate as corporate vehicles instead of as sole traders or partnerships – but why is that?
What are the differences between these structures and what is the right structure for your business?
Let’s consider some of the main business structures used to operate private medical practices.
Sole trader
An individual who runs a business alone has full autonomy and owns all of its assets personally. The individual has complete power in terms of running the business and making all the decisions – there is no distinction between management and ownership.
There are no particular requirements for setting up a business in this way and this keeps the set-up and operational administrative costs low. A sole trader doesn’t need any other documentation to govern how it is run.
There also aren’t any filing requirements in the same way that there is for some of the other structures mentioned below.
But the biggest risk is that a sole trader is personally liable for all the business’s liabilities. This means, for example, that any debts, claims or expenses of the business will have to be paid by them personally.
Any personal assets that they own, such as their residential home, are at risk if the business cannot meet its liabilities and creditors then demand payment.
Partnership
A general partnership is where two or more people carry on a business together, with a common view to make a profit. The default provision is that the partnership is governed by the Partnership Act 1890, which is very basic and does not provide certainty and stability.
Therefore, every partnership should have a partnership agreement – and ensure that it is kept up to date – to govern the relationship between the partners.
Without this, the decision-making and limitations on partners, the ability to expel partners and the terms of retirement do not exist, so can only occur with every partners’ agreement at the time.
The partnership may be terminated by any partner. Any of these may lead to catastrophic consequences on the business.
A partnership is made up of the collective group of individuals, so it does not have its own legal status. This means that where contracts are entered into, they are not entered into with the ‘partnership’ but with the partners as individuals, even though it is under the trading name of the partnership.
So it is those individuals that are liable for the debts and other obligations of the partnership. The liability will be joint and several and you, as a partner, may therefore end up responsible for acts or omissions of your partners.
Having a partnership agreement can minimise the risk of this to some extent through the contractual obligations it creates, but ultimately there is unlimited liability for the partners in this business structure.
As with a sole trader, there are minimal formation formalities and filing requirements, although a partnership agreement is something that any prudent person would insist on.
Limited liability company
A company is a trading vehicle and is separate from the individuals involved in the business.
There are different types of corporate structures, but the most common for the operation of a medical practice is a limited liability company.
This could be either a company limited by shares or one limited by guarantee. For the purpose of this article, we will look at limited liability companies generally and not the detailed differences between those types.
As the name suggests, these companies benefit from limited liability. This means that, aside from any other arrangements that the individuals enter into personally, the company pays its own debts and other obligations.
For a company limited by shares, a member would only be liable to lose what they paid for their shares and liable to pay the amount which is unpaid for their shares, which could be a nominal value of as little as 1p per share.
Unlike a sole trader or partnership model, a company is its own legal entity. This means it enters into contracts in its own name, and can make claims in its own name and be sued in its name.
There tends to be separation between owners and managers of companies, although, for smaller businesses, they might be the same individuals acting in both capacities.
Statutory duties
The owners are ‘members’ – shareholders in a company limited by shares – of the company, but they delegate day-to-day management of the company to ‘directors’. The members still have certain statutory rights with respect to the company.
Directors are subject to certain statutory duties, such as to promote the success of the company; to exercise reasonable care, skill and diligence and to avoid conflicts of interest.
A director may have personal liability to the extent that they don’t act appropriately. This is particularly the case if they are found to be trading wrongfully or fraudulently or when insolvent.
It is important that a company has a clear and sound governance structure, and its constitution, the Articles of Association, do need to be filed at Companies House. They are published for anyone to read.
If there are certain matters between the members that they don’t want to be publicly available, then they may also have a shareholders agreement, which isn’t filed. This is also a contract between the members.
While the biggest benefit of a company like this is the limited liability status, it does come with extra administration and running costs.
The company will be registered at Companies House. Various changes that occur in the company have to be notified to Companies House, such as changes in the share capital or of directors or of the Articles of Association.
Additionally, the accounts of the company will need to be made publicly available and filed annually at Companies House.
Limited liability partnership (LLP)
An LLP may be viewed as a hybrid between a limited company and a general partnership.
It has the benefit of being a separate legal entity and limited liability – so, unlike with a general partnership, it is able to enter into contract in its own name, rather than the individual partners.
It is also the entity that is liable for its own debts and obligations.
There is a statutory procedure that is needed to set up an LLP and there are some ongoing administration costs and filing obligations.
For example, the accounts of an LLP will be publicly available at Companies House.
While there is no statutory requirement for an LLP to have an LLP agreement, it is again something that is strongly advised. This will ensure that proper governance processes are in place, as opposed to relying on the basic statutory requirements under the Limited Liability Partnerships Act 2000.
Like a partnership, it does not have the same separation between owners and managers as a limited liability company does.
Planning a move
It is important to note that if you are looking into changing your current business structure, then this should be done properly and there may be tax and accountancy implications of the proposed change.
Obtaining proper advice first may save you from a financial shock and also ensure you are trading from one entity and not two, resulting in having to register both entities with regulators like the Care Quality Commission.
The business and assets may need to be transferred from one entity to another and a proper process should be followed for this to ensure that title to the assets legally transfer.
Check out the box above to see some other things doctors should consider if looking at transferring their business to a new entity.