Why do we have companies when we can have partnerships?
This article first appeared in Practice Management Magazine in April 2018.
One of the issues legal expert Justin Cumberlege often has to explain to practice managers is the difference of running a practice as a company, rather than a partnership. Here he takes an in-depth look at the subject and why the change can be of benefit to GPs.
The first thing to note when considering the difference between a company and partnership is Clause 12 of the Partnership Act 1890, which states: “Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the two last preceding sections.”
Those preceding sections state that “any wrongful act or omission” of any partner, or if a partner “misapplies” money or property belonging to someone else, during the course of the business or with the authority of the other partners, then all the partners are as liable as the partner who actually did, or omitted to do, the action. Furthermore, a person can make the claim against any one or more of the partners, regardless of the partner who did the wrongdoing.
In addition, every partner is liable for the debts of the practice, so creditors can claim from any (following the Civil Liability (Contribution) Act) or all of the partners the sums owed. All of which can be rather worrying.
The Act was brought into force to state that a “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”; it also clarifies what does not constitute a partnership, including a company registered under the Companies Act.
In a previous article in Practice Management (November 2016) I explained the importance of a partnership deed because of the vagueness of the Partnership Act, but a deed does not change the unlimited liability of a partner when a claim is made against the practice. This is one reason why every partner needs to check the other partners have proper and sufficient professional indemnity insurance cover, because all the partners could be liable if there is a claim.
What is a company?
As trade became more adventurous and riskier, and people less able to take the risks, but wanting to join in the rewards by participating in trade, the need to create something different became attractive. In addition, the issues of ensuring an action was done with the authority of the partnership needed to be overcome, and the solution was to create a legal entity which comprised a ‘company’ of people.
Companies were first established in 1856 under the Joint Stock Companies Act, and have been developed ever since. We now have the Companies Act 2006.
This is significant for GP surgeries because the liability of the shareholders is limited, often to a nominal value of £1, although the liability of the directors has become increasingly onerous over time, and in future articles we will look at the roles and responsibilities of each.
Why aren’t partnerships companies? Mainly this is for tax reasons, which are advantageous to partnerships (although much less so now).
Partly this is for traditional reasons. Until at least 2000 nearly all professional services firms (which a GP practice is) were partnerships – such as solicitors and accountants, because they are not in ‘trade’, and it was considered that as a professional you should be prepared to put your neck on the line for the advice you give. However, with the rise in risk of being sued for sums leading to the bankruptcy of partners, most have now become Limited Liability Partnerships (LLP), which are not dissimilar to companies in that the members of the LLP have limited liability.
Should GP practices be either companies or LLPs?
The National Health Service (General Medical Services Contracts) Regulations 2004, which set up the statutory framework for the GMS contracts, forgot to mention LLPs, which only became popular from about 2005. The PMS Regulations have the same flaw. This means a GMS or PMS contract holder cannot be an LLP.
Section 4 of the regulations do allow for companies owned by GPs to hold a GMS contract, and some practices are companies. This may be an attractive option for GPs considering a move into a business model which provides for more opportunities but carries greater business risks with it. Here is an example.
A practice has a patient list of 12,000, provided for by six partner GPs. Four want to retire. If they close the practice, the six GPs will have to pay redundancy to the support staff (if they cannot merge the practice).
There is a new housing development, with the potential of growing the list size by 2,000, and the two remaining partners decide to remodel the practice so that it will be: two GP partners, two salaried doctors, three nurses and two paramedics, with the support staff as before. They will build on two consulting rooms and an X-ray suite.
In addition to providing core GMS services to 14,000 patients they will provide additional services which the Commissioner has agreed to award on five-year contracts.
If the project does not succeed the two GP partners will be personally liable for the redundancy costs of all the staff and may not recover the cost of building the consulting rooms. If they did not have sufficient assets to cover the costs, the two partners could be made bankrupt (and would not be allowed to hold another GMS contract).
If in the above scenario the two GPs had formed a limited liability company, the company would be liable for the costs and the assets of the company would be used to pay the sums owing, but not the assets of the GP shareholders.
Investing in change
Given the personal risk to partners, there is little surprise that there is very little appetite to invest in innovative ways of providing care. Even if the risks of failure are small, to lose your house mid-way through your earning lifetime, and the loss of opportunity of re-establishing your business, is enough to dissuade most people from taking the chance. The result is an understandable caution against changing the way GP services are provided.
For some the solution is to form a separate legal entity to carry out some of the services, and have the traditional partnership carrying out the GMS work.
This can be done and is similar to what many dentists do. It has the advantage that, carefully structured, it creates an entity with goodwill that can be sold. Under the Primary Medical Services (Sale of Goodwill and Restrictions on Sub-contracting) Regulations 2004 goodwill cannot be sold where it relates to the holding of a patient list and delivering services to those patients. Therefore, it is possible to set up a separate legal entity to offer non essential services to the population (not specifically to the patients on the list of the practice). However this does create a clumsy arrangement of having a separate partnership and a company, which are not integrated.
Once GPs feel able to take business risks without facing personal financial ruin, there is a real possibility that new models of care will be developed and those that address the current issues in the delivery of primary care best will start to emerge and be copied.
This article does not constitute legal advice, and no liability for reliance on its content is accepted by Hempsons, its partners or the author. Legal advice should be sought before you act on any matters outlined in this article.