2.1 Operating a Practice Flashcards
What are some of the forms of practice?
-Sole trader/principal/practitioner-18%
-Partnership-21%
-Limited liability company-52%
-Others (unlimited companies, co-ops etc)-1%
What’s a sole trader?
-Have absolute control of the business, therefore all the profit goes to you but so does all the risk
-Can practise as a sole trader either alone or with employed staff
-Responsibility for debts, damages and liable to full extent of personal and business assets-can be made bankrupt
What is a partnership?
-The relationship which exists between two or more persons carrying on business in common with a view to profit
-Recommended to establish a formal deed of partnership (by a solicitor) setting out rights and responsibilities
-Compatibility of objectives, skills and personalities considered
-Name, apportionment of profit/loss, interest, banking and other financial matters, provision for new partners, dispute resolution etc
-Jointly and severally liable ie liable for their own obligation and that of their partner
Advantages of partnership?
-Equity owned by the partners-share all profits
-Allows sharing of resources
-Gives someone else to share burden of responsibility with
-Sharing and developing ideas and bounce ideas off
-Greater potential for networking and new work
-Bolster skills in weaker areas
Disadvantages of partnership?
-Joint liability for all debts and obligations-inc negligence-all business and personal assets
-Includes retired partners-if employed at the time
-Damages could be brought against one or several partners or the new partnership
-New partners have to ‘buy in’ either in capital or via salary retention
-Liability does not end at retirement/dissolving of partnership
-PII
What is a Private Limited Liability Company (Ltd)
-Legal entity separate from its members, liability of shareholders limited to the value of each shareholding
-Governed by various Companies Acts
-Must register with Registrar of Companies at Company House
-No limit to number of members, but at least one Director, often also a secretary
-Annual filed accounts available for public inspection may or may not be audited
-Eg TP Benefits
-Clearly identified management structure administered by Board of Directors
-Possible to have equity and non-equity and salary and non-salary directors
-Directors do not have to be architects
-Immunity from personal liability for debts, and company obligations to third parties
-Duty of care to the company, and duty to act in the company’s interests
Advantages of Ltd?
Predominantly financial:
-Directors usually not personally liable for the debts of the company
-Easier to change/retire/remove a director than a partner
-Internationally recognised
-Clearly established and recognisable taxation position
-All employees are subject to PAYE
-All salaries deductible before calculation of profit for tax
-Easier to raise outside finances
-Can separate ownership and management
Disadvantages of Ltd?
Management:
-Ownership may pass outside original architectural proprietor
-Less flexibility, additional administrative and financial burden
-Difficulty of dissolving practice
Finance:
-Accounts available to public
-Difficult tax position when winding up a company
-Some reference to view of ‘less professional’
What are some considerations of Ltd?
-Management and structure
-Liability
-Finance and taxation
-Professional Indemnity Insurance
-Succession planning
What is a Public Limited Liability Company (plc)
-Public may buy and sell shares
-Higher level of share capital required-minimum £50,000
-Stricter rules and regulations
-Very rare
What is a Limited liability partnership?
-Act of 2000, combining some characteristics of partnership and Ltd
-Separate legal entity distinct from members
-Treated as partnership for income and capital gains tax purposes
-Registered with Registrar of Companies and submit audited accounts
-No directors, but liability limited to stake in partnership
Why set up as an Employee Ownership business?
-Staff are more committed to business’ success; due to financial stake and role in decision-making
-Can lead to improved productivity and morale
-Staff feel valued, heard and are willing to invest
-Safeguards future business-succession planning
-Bringing in/retiring members is a simple process
-Can have limited tax-free performance bonuses up to £3600
-High levels of staff retention
-Attractive for existing shareholders when selling up to an Employee Owned Trust (EOT) and 0% Capital gains tax purposes
Reasons to not set up an Employee Ownership business
-Relatively new so not as much data available
-Some evidence that a lack of senior management driving the company can result in a lack of focus and direction
-When selling into an EOT, share value may be lower than selling to another investor
-Requires legal and financial advice to set up so take up is typically from larger practices
Employee owned practice/alternative models
-Increasing numbers of practices adopting alternative models; covid, succession, finance, ethics, etc
-May be traditionally set up as eg a co-operative, or hybrid eg run by a senior management team and owned by all
-Employee Ownership Trust (EOT)-all employees benefit on same terms
-Employee Benefit Trust (EBT)-more shares can be allocated to different employees
-Social Enterprise
What are some issues raised about Emplyee owned practice/alternative models?
-Some of the issues raised in the article:
-Succession planning
-Simplified structure
-Solves issue of only those rich enough can buy in
-Tax reform incentivisation
-Staff see value in contributing
-Requires greater transparency
