This article was written for and first featured in Insurance Day
Doug Preece looks at the benefits of running a broking business through an LLP.
In late 2010 Lockton announced it was planning to convert to a limited liability partnership as its choice of business vehicle in the UK. This was not the first broker to convert to an LLP but given Lockton’s position in the market, firms should consider why this was an attractive route for Lockton’s to follow.
Julian James, chief executive officer at Lockton commenting on the change in status, gave the following reason as one of the drivers for change, “We feel that as part of the continuing culture change within Lockton International a partnership model gives our associates a greater say in the running of the business and it engenders more of a partnership style culture than a management led one”. The impact of managers having the status of partner and the effect of the alignment of interests between the business and its partners is something which can only be measured going forward but it must be more than coincidence that the LLP vehicle has been adopted by the more successful professional service firms in the UK.
An LLP gives great flexibility in structuring ownership interests and remuneration systems. These arrangements are private, apart from an obligation to disclose the earnings (but not the name) of the highest paid member. There is no obligation to disclose the details of an LLP members agreement and ownership interests, unlike the position of a limited company where details of share ownership and the articles of association have to be available to the public.
Another primary reason for the conversion was the tax position. Generally, members of an LLP are not employees. For tax purposes members are taxed as self-employed partners in a partnership. This means that no employer’s national insurance contributions are payable on the earnings of the members. These contributions are currently payable at 13.8%. An LLP paying its members £10million in earnings would have an additional £1.38 million to allocate, compared to a limited company. This is one of the reasons why LLP’s are popular with professional service businesses, where the major item of expense is the cost of staff.
With the increase in income tax on earnings to a top rate of 50%, more LLP’s now have corporate members as part of their structure to take advantage of the difference between income tax and corporation tax rates. There can also be other tax benefits in using an LLP vehicle.
Converting to LLP status was considered for a long time to be an issue for clients. The experience of professional service firms is that clients do not have a problem with the change. There will of course be costs involved in converting a limited company business to operate through an LLP and managing the process with the FSA will be a key timetable component. The national insurance saving gives an immediate benefit against which firms can budget the cost of a change in status. Given these circumstances it is surprising that more brokers have not converted to LLP’s.
Doug Preece is a partner in the professional practices group as law firm Fox Williams LLP