In recent weeks Thames Tap has reported on how a number of property professionals are leaving large organisations and setting up their own businesses. Peter James, partner at Clark Holt Commercial Solicitors, reviews the likely business structures that such property professionals could adopt, but first considers one or two hurdles they may face.
In a number of cases, property professionals leave with the blessing of their current employer.
However, this will not always be the case so you need to review any confidentiality and anti-competition provisions in your contract of employment.
There is a common misconception that restrictive covenants will not be enforceable but many have found, to their cost, that this is often not the case. Details of clients will be the confidential information of your employer.
A related point is that of garden leave. It sounds superficially attractive to be paid to sit in your garden for three or six months, but, since you will still owe duties of confidentiality and non-competition to your current employer, it makes it very difficult, if not impossible, to do anything to establishing your new business in this period.
If you are able to overcome these hurdles you will need to consider the trading vehicle you will use.
Although there are other vehicles, the most likely are a sole trader, a partnership, a limited liability partnership or a company limited by shares.
A very relevant consideration will be the different taxation treatment of these vehicles, so you should get expert advice on tax issues before you set up the business.
Looking briefly at each of the most common vehicles:
A sole trader is a person carrying on business in his or her personal capacity. The main advantages of carrying on a business as a sole trader are that a sole trader has to comply with few formalities in order to carry on his business as a sole trader, other than notifying HMRC about the sole trading business, ensuring that records are kept, submitting tax returns and paying income tax and/or VAT as required.
A sole trader also has complete control over the management of his business, without any obligation to publicly disclose any information.
However, the main disadvantage is that he or she does not benefit from limited liability, so will be personally liable for all the debts and obligations of the business.
This risk can be mitigated, to an extent, by having comprehensive business insurance, but the risk of personal liability is often the reason why you may wish to consider setting up a more formal business structure.
A general partnership is one that is formed under the Partnership Act 1890 with at least two partners.
It is defined as a ‘relation that subsists between two or more persons carrying on business in common with a view of profit’.
A partnership is not a separate entity, distinct from its partners. This means that the partners in the partnership have unlimited liability.
The main advantages of carrying on business through a partnership are that:
- The partners have the flexibility to choose the management structure of the partnership by agreement.
- There is no public register of partnerships and there is little to no publicly disclosed information about the partnership (other than certain changes in a partnership’s constitution), so the partners are able to keep their affairs private.
- The partnership agreement (if any) does not have to be publicly disclosed, and
- The partnership’s financial information is not required to be publicly disclosed, except in very limited circumstances
However, the main disadvantage is that each partner is jointly liable for the debts and obligations of the partnership incurred while he is a partner, and such liability is potentially unlimited. After his death, a partner’s estate may also have some liability for such debts and obligations.
Limited liability partnership (LLP)
LLPs are incorporated under the Limited Liability Partnership Act 2000 by two or more persons, associated for carrying on a lawful business with a view to profit, by making an application to Companies House.
An LLP is a body corporate that is a separate legal entity from its members. There needs to be two or more ‘designated members’ of an LLP who are designated, either on incorporation or by, and in accordance with, an agreement with the other members.
The designated members have certain administrative responsibilities in relation to an LLP, such as delivering information to Companies House. If fewer than two members are expressly designated, then every member is deemed to be a designated member.
LLPs have to make a number of public disclosures by making filings at Companies House, similar to those made by a company. For example, an LLP must file details of its members, charges and mortgages, must file accounts annually and must notify Companies House of any changes in its name, registered office and members.
The main advantage of carrying on business through an LLP is the limited liability of the members for the debts and obligations of the LLP. If an LLP is wound up, a member’s liability to contribute is limited to the amount that the member has agreed with the other members or with the LLP that he will contribute.
One of the main disadvantages of carrying on business through an LLP is the significant level of public disclosure (apart from the LLP agreement).
Company limited by shares
The fact that the company is a separate legal entity and is responsible for its own debts and liabilities in its own name and that the shareholders have limited liability are the main advantages of carrying on business through a company limited by shares.
The perceived main disadvantage of carrying on business through a company limited by shares is the level of public disclosure such companies are required to make through filings at Companies House.
For example, a company must register information about its directors, charges and mortgages, file annual accounts and a confirmation statement and notify changes in its name and registered office.
In addition, the constitutional documents of a company limited by shares (its memorandum and articles of association), must be filed at Companies House and are publicly available.
Please note that this article is provided for general guidance and is not a substitute for legal advice on specific circumstances.
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