Traditionally many professional businesses – lawyers, accountants, doctors, architects, engineers and the like – have been run as partnerships.The expectation was that a young professional would study their chosen area in depth and then gain experience working for more experienced practitioners before being assumed as partner and would then spend their working life serving clients (or patients in the case of doctors).
However, for many professions that has changed.Increasing numbers of professionals now choose to run their business in some other guise.There are various reasons for that but there are perhaps three key reasons.
Firstly, a partner in a traditional partnership has unlimited liability. This means that they are personally exposed to the liabilities of the business.Historically, business liabilities for the professions were often seen as limited. Their status as a professional, both in the community and at law, was hard-won and fiercely protected. Put simply, having achieved that status – particularly in regulated professions such as law and medicine – partnerships tended to be run in a prudent, cautious and sober manner. In fact only prudent, cautious and sober people were seen as suitable candidates for partnership in the first place.
Of course there were (and are) exceptions to this generalisation but it broadly holds true.
But the world of the 21st Century is a different place.Professional businesses are just that – businesses.They are increasingly exposed to the risks which afflict the business world more generally. Not only are they exposed to such risks but some actively take them on as they seek growth in size, fees and geographical reach. The legal sector has seen this particularly starkly.There have been a number of law firms which have folded leaving the partners to meet costs such as ongoing lease liabilities.Some seemingly successful lawyers have been personally bankrupted as a consequence.
But it’s not just lawyers who face these challenges.They affect all professions and often in ways that were unforeseen when partners first joined.
Secondly, the underlying rules which govern traditional partnerships is the Partnership Act 1890. Unsurprisingly legislation written in the latter years of Queen Victoria’s reign does not address the needs and requirements of a modern business. Whilst a well-written partnership agreementcan mitigate against some of these issues it remains the fact that a traditional partnership is often a difficult beast to operate. Of course, there are many partnerships which don’t have a well-written partnership agreement and indeed plenty that have no partnership agreement at all. For these partnerships the law can appear odd if not downright perverse to modern business people.
However, the tax neutrality and non-existent public transparency of a partnership has meant that for many professions partnership remains the default structure.
Thirdly, there is a misconception amongst some professions that they “have to be” a partnership because “the law” or their regulator requires it. This is a very common misconception amongst GPs many of whom believe that they are simply not allowed to be run as limited companies or limited liability partnerships.
This is a complete fallacy.In Scotland the Tobacco and Primary Medical Services (Scotland) Act 2010 makes express provision that, whilst GP Contractors can be sole practitioners or partnerships, they can also practice as limited companies or limited liability partnerships. There is no legal reason why a GP Contractor cannot do what many other professions do and run their businesses as either a limited company or a limited liability partnership. There are plenty of reasons why a GP Contractor could choose to do so in just the same way that many other professionals have chosen to.
For instance, a great many law firms are Limited Liability Partnerships. They “look and feel” very similar to a traditional partnership except that the partners (or members as they are called) are not normally personally responsible for any partnership liabilities. Incorporation isn’t a panacea for all ills. If a partner has capital invested in the limited liability partnership, as will tend to be the case, then that is still at risk. However, in the normal course of things partners’ houses, ISAs, holiday homes and so on are not exposed to the business risk.
It’s also the case that there is a process to be gone through in forming a limited liability partnership (or limited company). Employment contracts need transferred to the new entity. Leases, bank loans and indeed property ownership may also need to be amended which in turn will require the partners to engage with the landlord and/or the bank manager. The GMS/PMS contract will need to be novated to the new limited liability partnership (or limited company).
Many other professionals think this process is worth going through in their profession. It is surprising that more GPs haven’t considered doing the same.Some have but they are few in number. However, as well as protecting existing partners, incorporation may also be at least part of the solution to attracting new partners. This is because limited liability has the effect of at least partially preventing new partners from becoming “contaminated” by historic issues.
At Davidson Chalmers Stewart we are experienced in assisting professional partnerships in incorporating either as limited companies or as limited liability partnerships. So much so that we are the “go-to” lawyers for other law firms when they come to go through the process. We also have direct experience of incorporating GP partnerships. If you would like to know about what is involved please get in touch.
