Consultant’s collaborative working arrangements
It is quite common for consultants to join together and work more collaboratively. This can ease the burden of working alone and being solely responsible for all costs and expenses. Working together can alleviate some of that pressure and assist in moving a business forward.
There are many different business vehicles under which consultants can work together; each with different advantages and disadvantages. If a consultant is looking for a new collaborative work opportunity, then the business vehicle under which he or she chooses to operate will be highly important.
This article looks particularly at limited liability partnerships, limited liability companies, expense sharing arrangements and traditional partnerships.
Limited Liability Partnerships
A limited liability partnership is a corporate entity, the members of which benefit from limited liability i.e. they cannot lose more than they invest. Unlike a traditional partnership, an LLP has its own legal status and can therefore enter into contracts in its own name.
In terms of profit shares, there is flexibility as to how this is arranged and it may be akin to that of a traditional partnership. The member receiving the profits is taxed on those profits – as opposed to the LLP being taxed on them.
An LLP has the additional advantage of being more flexible in terms of exit and it can largely decide itself how this will be dealt with.
An LLP is registered at Companies House and has reporting requirements e.g. membership and accounts must be filed and they are publically available.
A consultant will need to consider whether or not they are required to be a designated member. A designated member has many administrative duties, similar to that of a company secretary.
Limited Liability Company
Consultants may also choose to work together via a limited company, most likely a company limited by shares. As with an LLP, this creates a separate legal entity and must be registered at Companies House. Its constitutional documents will be accessible to the public and statutory registers must be maintained. A limited liability company also has filing requirements including annual accounts and confirmation statements.
There are two distinct sets of people who run a limited liability company; the directors and the shareholders. The directors are those who have control over the day to day management of the company. They must comply with statutory duties and therefore act in the best interests of the company. The shareholders are the owners of the company and their liability is limited to what they agreed to pay for their shares. They have the right to make certain statutory decisions and additional decisions that may be reserved for them pursuant to the company’s Articles of Association.
A consultant who becomes a shareholder of a limited liability company may receive a dividend in respect of the profits of the company. It is important to note that, as with profits of an LLP, the member will be taxed on their receipt of profits. However, unlike an LLP, the company will also be taxed on its profits.
This is where a group of individuals retain their own fees but share the expenses of running their practices, such as staff, equipment and premises rent. They can therefore choose to work as much or as little as they would like depending on how much they want to personally earn. Each practice is independent and is responsible for its own business.
There is a risk that an expense sharing arrangement may be viewed by the outside world as a partnership. Expense sharers must therefore be very careful as to how they describe themselves to the outside world – avoiding use of the term ”partnership” and demonstrating that they do each have separate and independent businesses. It is quite common to see one lead expense sharer who will enter the relevant contracts on behalf of the group. The lead individual would then have to rely on the others to make their respective contributions. Some of the risks of an expense share arrangement can be circumvented by having a robust expense sharing agreement in place; clearly setting out the requisite liabilities of each party and who shall enter into contracts.
Some consultants may work together in the form of a traditional partnership. This is a less common way for consultants to work.
Legally, a partnership is formed by individuals working together with a view to making a profit. It is therefore quite possible to inadvertently create a partnership by working together with other practitioners.
A partnership offers consultants the opportunity to own a part of the business for which they are working. As well as owning a share of the business, it is also means that the partners share the liabilities.
One key distinction between a traditional partnership and a limited liability partnership is that a traditional partnership does not have its own legal entity. This means that when the partnership enters into contracts, it is the individuals that are doing so in their own names, rather than collectively as a partnership. The liability of the partners is unlimited and joint and several so one individual can bear the costs of another individual’s error. If the partnership does not have the funds to cover the liabilities of the business, the partners could have to settle those out of their own personal assets.
Without a formal partnership agreement, a partnership can provide a very unstable relationship and any partner could turn around at any time and say that they wish to dissolve the partnership – this could have a disastrous effect on the business. Where the partnership can be terminated in this way, it is known as a Partnership at Will.
If a consultant is looking to join a partnership, then the consultant needs to consider the current partnership arrangements in place and the cost of buying in (to partnership assets as well as working capital requirements).
Whatever type of business structure a consultant choses to join/set up, advice should always be sought to ensure that they are aware of the liabilities that they are taking on and to assist in mitigating any potential losses. All of these structures should have a written agreement in place dealing with these issues. At Hempsons, we have a dedicated team that can advise on the implications of joining different business models and help to negotiate requisite documentation seeking to protect the individual’s interests.