Family Business – Choosing the Right Business Structure
Many family businesses are carried on through limited companies. However, some are also carried on through a general partnership or a limited liability partnership (an LLP).
There are various tax and other considerations which need to be borne in mind when deciding which legal structure is most appropriate for the business:
Taxation: There are a number of key distinctions:
- A limited company is taxed on the profits it makes and the shareholders are taxed on any dividends or salaries received
- A general partnership is not a separate legal entity and the partners are taxed personally on their respective shares of the partnership’s profits
- Although an LLP is a separate legal entity from its members, for tax purposes it is treated like a general partnership. The LLP is not taxed and it is the members of the LLP who are taxed on their respective shares of the LLP’s profits.
The liability of the owners: The extent to which liability is limited varies according to the structure chosen:
- The shareholders in a limited company enjoy limited liability and are only liable up to the amount paid up on their shares
- The members of an LLP also enjoy limited liability in that they are not liable beyond the assets they have put into the LLP (for example, any capital). However, if the LLP becomes insolvent, amounts withdrawn by the members in the two year period prior to the winding up of the LLP can be clawed back in certain circumstances. Also, an individual member of an LLP who is negligent may, depending on the circumstances, be personally liable, particularly if he or she can be shown to have assumed a personal duty of care to a third party .
- The partners in a general partnership have unlimited joint and several liability.
Separate legal entity?: Limited companies and LLPs are separate legal entities and can therefore enter into contracts in their own name. They can also, for example, grant floating charges over their respective assets as security for any borrowings. A general partnership is not a separate legal entity and therefore the partners enter into contracts in their own names.
Disclosure of information to the public: Limited companies and LLPs are treated similarly in terms of the requirement to file financial accounts and other information with the Registrar of Companies. However, there are obviously differences in the nature of the information which must be filed because, for example, an LLP does not have a share capital.
General partnerships do not have to file either their accounts or any other information with the Registrar of Companies.
A limited company is also required to file its Memorandum and Articles of Association with the Registrar of Companies. There is no comparable requirement for a general partnership or an LLP, as neither the partnership agreement of a general partnership nor the membership agreement (or limited liability partnership agreement) of an LLP have to be filed. These remain private documents.
Although the Memorandum and Articles of Association is a public document, the shareholders of a limited company often enter into a Shareholders’ Agreement setting out the way in which they have agreed the company will be run. This document does not normally need to be filed with the Registrar and can remain private.
Audited accounts: Subject to certain exemptions for small businesses, the accounts of both limited companies and LLPs must be audited. In most cases there is no requirement for a general partnership to have its accounts audited, however large it may be.
Statutory regulation: Limited companies, LLPs and general partnerships are regulated by different statutes:
- Limited companies: regulated mainly by the Companies Acts 1985 and 2006
- LLPs: regulated mainly by the Limited Liability Partnerships Act 2000
- General partnerships: regulated by the Partnership Act 1890
Withdrawal of capital: There are company law constraints on the reduction or repayment of share capital. The only restrictions on the withdrawal of capital from LLPs or general partnerships will be whatever restrictions have been agreed between the members or partners, respectively.
It will be apparent from the above that LLPs are a hybrid structure in that they are similar to a limited company in terms of matters such as:
- the public disclosure of information
- accounting requirements
- limited liability and
- contracting with third parties
but are similar to general partnerships in the sense that:
- they are taxed in the same way and
- partnership and LLP membership agreements are both private documents dealing with similar matters.
Public and private companies: Most family businesses that are carried on through a limited company will be carried on though a private limited company. However, there are some larger family businesses which are carried on through public limited companies or PLCs.