Survey finds that 90% of “People Businesses” have not re-assessed their business structure since formation

A recent survey by law firm Mishcon de Reya found that 90% of service-based businesses have never considered changing the legal structure of their company; of those that have, 64% have never considered a limited liability partnership (LLP) as an option and 10% admitted that they had never heard of an LLP structure.

The survey also highlights a lack of knowledge about how the LLP structure can benefit a wider range of industries. A belief traditionally held is that service based industries reap the rewards of the LLP structure more than other industries. In reality, the benefits can apply across a wide range of industries; in any company that has its people as a key asset.

When compared to a survey of existing LLPs - where 100% of respondents stated that they were happy with their LLP structure, and listed tax and legal advantages and increased flexibility as the top three benefits - the key finding of the research is that the vast majority of businesses could be missing out on the significant financial and cultural benefits of becoming an LLP.

The research, undertaken in conjunction with renowned business intelligence service, mergermarket, surveyed 100 businesses. Of the 90% that admitted to never having thought about changing their structure, 80% were limited companies. 54% did not have a specific reason for not considering an LLP structure and the research highlighted a general lack of understanding of the benefits and challenges - over half (54%) weren’t aware of the benefits.

Of those respondents that had considered and decided against an LLP structure, reasons for this decision included “we’re too small”, “we felt it was a bit too stuffy” and “more appropriate for bigger companies”.

For those companies that have already changed to an LLP structure, the advantages clearly go beyond purely financial. 57% responded that the biggest advantage was the ability to build staff loyalty by making them partners.

Commenting on the findings, Nick Davis, Head of the Corporate Department at Mishcon de Reya, said: “Whatever the size of your business it is important to reassess company structure at each stage of your businesses life cycle. Conversion to an LLP structure can be a flexible and beneficial solution for many types of “people businesses” both financially and in terms of boosting staff morale.”

He continued: “In a time of recession and austerity changing your business structure is a smart way to increase your profit margins and to eke out value wherever possible.”

The report also highlighted the importance of ensuring that the process of converting to LLP is carefully managed, with existing LLPs listing challenges as including exit strategies, junior members seeking to participate in management decisions and dealing with the quasi-employment status of their members.

Joanna Blackburn, Head of Mishcon de Reya’s Employment Department added: “While converting to an LLP structure offers clear benefits and significant opportunity - it can be much better for managing and incentivising existing and outgoing senior staff - you need to know what you're doing. If you get the basics right, areas such as enforcement of post termination restrictive covenants and exits of senior staff will become more manageable. Individuals and businesses need to ensure they are aware of what they are doing in order to avoid potential pitfalls.”