October 29th, 2012 / Insight posted in

Giving shares to new partners

TE writes: Having been a consultant for many years, I have seen an opportunity to grow my business by bringing in other consultants. A simple company, wholly owned by me was sufficient in the past, but this will not work going forward as the key consultants will need an interest in the ownership and profitability of the business. I would like to retain control of the business initially, but want a flexible way of sharing the profits. Can this be achieved using my company or would I be better off starting anew?

You could use your existing company, although you would need to be careful about how you give other consultants shares in your business. Starting afresh using a partnership structure might give you a better result, writes Jon Sutcliffe, partner at Kingston Smith LLP. Giving a consultant shares in a company, and any subsequent transfers of shares bring tax implications. This is generally less restrictive where a partnership is used. Similarly, paying salaries and performance bonuses through a company payroll can bring high tax burdens, so you should consider using a partnership.

If you form a partnership, you and your partners are individually self employed for tax purposes. If the nature of your consulting means you need the benefit of limited liability protection, then a limited liability partnership (LLP) would be appropriate. An LLP is a cross between a partnership and a limited company. You can organise your business and pay tax in the same way as if you were an ordinary partnership, but your personal liability for debts of the business may be limited in certain respects.

Operating an LLP brings with it similar administrative burdens to functioning as a company, including having to notify Companies House of the business address and the names of the partners, placing accounts on public record every year and having them audited if the statutory audit threshold is exceeded.

Regardless of whether you do operate as an LLP, you should have a written partnership or shareholders’ agreement in place. This may help to avoid future disagreements about how you share the profits and may help to resolve any disputes. The agreement would also cover issues such as how new consultants would be dealt with, how you might handle non-performing consultants, and how the business might be managed.