However, these structures are often either tax inefficient or expensive to establish and maintain. Frequently they also fail to reflect the changing reality of the business as new staff join and the contribution of existing staff changes.
The introduction of limited liability partnerships (LLPs) gives companies the chance to address some of these issues, in particular because of the different tax treatment of LLPs. In this context there are two key differences between LLPs and limited companies - first that the members of an LLP, who are usually its senior staff, are treated as self-employed for tax purposes, and secondly that the rules relating to the issue of shares and options to employees to do apply to them. These advantages are inherent to LLPs and do not require complex or risky tax structuring, unlike many schemes on the market.
The core consequence of members of LLPs being treated as self-employed is that no employer's national insurance is payable on their remuneration. This creates a saving of 13.8% of their salary and bonus which can be used to increase their pay to more competitive levels, to increase overall "post-pay" profitability or a combination of the two. The impact of this significant saving on profits and the motivation of staff can be significant.
In addition, the rights to receive profits attaching to "shares" can be split between ordinary-course trading profits which are used to pay the members monthly income and "bonuses", and capital and other profits such as those which would be realised on a sale. This means that capital rewards can be focused mainly on the most senior staff while retaining flexibility in the day to day rewards of all members.
The rules relating to ownership interests in LLPs are very different to those relating to limited companies. Whilst each member of the LLP must have some right to participate in the profits on a sale of the business this can be as large or small as you believe is appropriate, and can easily be adjusted to reflect the changing contribution of members. In particular "shares" can be given to or taken away from members at any time and for no money, or on whatever other basis the agreement governing the LLP provides for. The issues around reduction of share capital, or the complexities around buy-backs of shares in companies are not relevant to LLPs. This allows the creation of useful structures such as a scheme allowing staff to increase their interests in capital profits as turnover or profits grow or other targets are reached. This allows you to ensure that the right people are being rewarded at the right level as your business evolves, and that no-one rests on their laurels.
Finally, the combination of the possibility of additional pay and "shares" which genuinely reflect contribution are a very effective way of motivating staff who are not members through the use of potential for membership and the rewards it brings as a carrot to motivate non-member staff.
John Young (pictured) is legal director at Mishcon de Reya (corporate department)
