Firms considering Incorporation

Should I Incorporate? How limited company status can benefit legal professionals

RDP Newmans boasts a track record of advising on and implementing tax-effective business models for legal professionals.

For barristers

The Bar Standards Board (BSB) has now introduced new regulations regarding entity regulation for barristers.

This will no longer restrict barristers to having to trade as ‘self-employed’. The new entities can either be Barrister Only Entities (BOE) and/or Alternative Business Structure (ABS).

The BSB will now be able to regulate organisations owned and managed by barristers and other lawyers.

The BSB explains the benefits as being that barristers and other advocacy-focused lawyers will be able to pool together resources and share the risks of investing in their own business, without having to change regulators.

For Solicitors

Contrary to popular belief, solicitors have more options available to them than just that of the partnership model (LLP).

Like any other business, solicitors can incorporate as a limited company (LLP), either as a recognised body, where all stakeholders are recognised legal professionals, or as an Alternative Business Structure (ABS), where there is at least one legal professional with a stake in the firm.

Why Incorporate?

In general business terms, incorporation is looked upon favourably because of the tax advantages it offers; also the limitation of liability where private assets are safeguarded from a company’s debts.

But we strongly recommend that lawyers think carefully and take specialist advice before embarking upon any changes.

Key considerations:

  • incorporation can be done tax-free;
  • it is possible to structure an incorporation to utilise Entrepreneurs’ Relief;
  • companies are not tax transparent but do benefit from limited liability like LLPs;
  • companies have tax liabilities in their own right, paying corporation tax, but the headline rate fell to 20% from 1 April 2015 which matches the basic rate of income tax that partners would pay on LLP profits;
  • partners would become employees so Class 1 Employers’ and Employees’ National Insurance Contributions would be payable on salaries and bonuses. This may not be economically desirable but it would provide tax certainty compared to the uncertainty of the salaried members rules that now apply for LLPs;
  • partners would have rights as employees;
  • partners would become shareholders in a company, able to receive dividends that attract lower rates of income tax and no National Insurance;
  • employees would, ordinarily, only be taxed on amounts received. LLP members’ tax position can be complicated by the fact that tax liabilities are based on profit allocations rather than cash distributions  and so members can suffer a tax charge on remuneration that they do not receive until later;
  • a company structure gives the opportunity to engage all staff, or key individuals, through employee share incentives;
  • profits can be accumulated within the company, and they do not need to be distributed in full, unlike LLPs that must allocate all profits;
  • company shareholdings might be easier to sell to third parties than shares in a partnership;
  • partners would become company directors and need to consider the differing legal and fiduciary duties compared to those of being partners in a partnership;

The obvious key driver, of course, is what structure best suits the commercial objectives of your business. While tax is a key issue, it is also advisable to take advice on governance, regulation and reporting requirements.

If you run your business as a company you may save a considerable amount of tax. However, there may be disadvantages and a sole trade or partnership structure may be better. At RDP Newmans we can show you the potential tax savings currently available to you from operating as a company.

Please do not hesitate to contact us.

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