News Analysis: The pros and cons of choosing LLP

Brunswick is considering it, but why haven't more PR agencies gone down the limited liability partnership road? Tom Williams discovers that although the structure motivates staff, the financial outlook is uncertain

When Alan Parker announced last week that he intended to change Brunswick into a limited liability partnership (LLP), the move was greeted as both a PR and financial masterstroke. By putting 40 per cent of Brunswick's equity into a pot from which each 'partner' could buy a stake in the firm at around £20,000 a shot, Parker put paid to the possible defection of the firm's more disgruntled senior consultants. And it won't cost him a penny, either.

Moving from a private limited company to a partnership means that each of Brunswick's 'partners' will be real partners in the sense that they own part of the firm. As owners, each partner will no longer pay 12.8 per cent national insurance under English tax law, netting each of them a tidy sum at zero expense to Brunswick's profits.

Richard Linsell, head of law firm Mayer Brown Rowe & Maw's professional practices group, says he has been trying to convince PR firms of the merits of this structure for years.

'The advantage of a limited liability partnership for a PR firm is that the partnership is on the inside. If I have 80 per cent of the shares and you have 20 per cent, I can sell that equity and you can build up your stake. In a company I have to find a way of moving that equity from me to you through shares,' says Linsell.

The pros and cons

Odd perhaps, then, that so few PR firms have taken up this option. Over 7,143 organisations have registered as LLPs since the enactment of the 2000 Limited Liability Partnerships Act in 2001 and although Companies House does not classify them according to types of business, PRWeek knows of no PR firm that has LLP status.

Although many firms dream wistfully of becoming LLPs and make much of their 'partnership structure', few can even claim to be partnerships in the real sense of the word. The 20-partner Lansons is one of those few, though it does not have the limited liability status of an LLP whose partners are only liable for the percentage of the equity that they own.

It is interesting, for example, that Andrew Grant, founder of Tulchan Communications and an ex-Brunswick partner, has not adopted this structure. Grant insists that equity issue had nothing to do with his leaving Brunswick in 2000, but is generally more positive about structures to motivate staff. Tulchan looked at LLP status on its inception and opted instead for a system of shares in 20 per cent of the company, for which Grant intends to create an internal market next year.

'Whether you offer people shares or partnership they are obviously going to feel better at being emotionally involved in and owning part of the business. I want people to have a definite stake in the business and see that capital value grow. They can share in the value of the business through bonuses and also through the value of the shares that have been created,' says Grant.

Lansons co-founder Tony Langham is unsurprisingly bullish about the flexibility and way in which partnership structures can motivate senior consultants. But he is also frank about the downsides. 'Under a partnership structure, you are bound together legally, so if a partner leaves acrimoniously the legal issues can be quite complicated,' he says.

There are other reasons why firms may not want to embrace the flexibility of partnership status. Consolidated Communications finance director Stephen Marsh says the fact that many PR firms are backed by venture capital or are seeking it means that partnership status is not an option. 'The main problem with a partnership structure is that it makes equity investment harder. For example, investors prefer the clarity of the capital structure of a company, whereas in a partnership, the percentages of equity held and by whom varies as partners come and go,' says Marsh.

Some firms in the PR industry such as Citigate Dewe Rogerson, August.One Communications and Text 100 might be expected to take LLP structure more seriously. Like auditor PricewaterhouseCoopers which began trading as an LLP last year, such firms have reached a critical mass where further growth in such a people-based business arguably demands a more equitable distribution of the profits brought in by senior consultants.

But in all these cases, the move to an LLP is complicated by the presence of another stakeholder. Citigate or part of the firm would have to cut its ties with parent company Incepta while August.One and Text 100 are part of Next Fifteen Communications Group.

Tightening the loophole

Even Linsell, a self-confessed fan of the LLP structure, points out that the niceties of English tax law can come back to bite you. Decorporation usually involves a capital gains tax levy of up to 40 per cent of the firm's profits, says Linsell, so it is not uncommon for banking organisations, for example, to set up an adjunct firm to create an LLP.

Langham is similarly sceptical about the tax benefits of partnership structures as these are balanced out by the more general capital gains take on the profits of the partnership as a whole.

Others, like Lexis Public Relations finance director Greg Broadbent, worry that partners will not put the money necessary to finance growth back into the business, focusing instead on growing the profits they make.

Whatever the merits of the LLP move, the opportunity may not be around for much longer. Many feel that the tax wheeze that LLP status offers has not gone unnoticed by a Treasury that has often talked about closing such loopholes.

If Parker is serious about the move to LLP status, it would be good for partners at Brunswick if he moved quickly.

LIMITED LIABILITY PARTNERSHIPS

- What are they? Each partner shares in the profits and ownership of the firm. A partner gets back the percentage of the profits they have been allocated or bought. In the event of bankruptcy or legal proceedings, each partner is only liable for their part of the firm's equity

- What's so good about them? Motivating better performance, but the real advantage is tax. As LLP partners own the firm, they are taxed individually on their profits and do not pay 12.8 per cent national insurance on their earnings. For a consultant on £50,000 a year, a switch to a partnership structure will mean a £6,800 pay rise and will cost the firm nothing

- But isn't it really complicated and expensive to set up an LLP? No.

You can download a registration form at the Companies House website (www.companies-house.gov.uk/forms/formsOnline.shtml), fill it in and post it with £95 to its office in Cardiff. If you want to have three or more partners it is usually a good idea to draw up an internal agreement, which unlike company articles is a private document

- So why don't all firms do this? Disincorporating a company can lead to a 40 per cent capital gains tax penalty and some think the Government may soon rein in on the new regulations. Every professional service company that becomes an LLP means less money for Gordon Brown.

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