Should GP Practices Consider Becoming Limited Liability Partnerships?

GPs have long practised within a traditional partnership structure, but Limited Liability Partnerships (“LLP”) may provide some GPs with a more suitable alternative to the traditional partnership business structure for certain purposes. An LLP is a body corporate and a legal entity separate from its members and members benefit from limited liability (save in certain limited circumstances).

Here, we explain some of the benefits and disadvantages of an LLP structure, the practical implications of incorporating as an LLP, how GPs may be able to maximise the commercial and organisational benefits associated with the LLP structure and certain impediments to using this type of vehicle.

Which practices are best suited to the LLP structure?

Practices most likely to benefit from the LLP business structure will probably be larger practices, in particular those which are expanding and/or developing specialist practice areas with a view to making profits. These practices will benefit from the greater flexibility in how the practice can be managed under an LLP structure. The limited liability status will protect the member’s personal assets from the liabilities of the business which will be attractive to members of ambitious practices. As an LLP (or indeed a limited company) is deemed to be a legal person, it may well provide a more convenient vehicle for securing access to more extensive investment or finance. It will also mean that the LLP can buy and rent property, employee the practice staff and enter into other contracts. 

The LLP structure is not suitable for all practices and it should be considered in light of a range of ways of organising the business. Public disclosure of information is a key difference between a traditional partnership and an LLP. In particular, the LLP accounts will need to be filed at Companies House and may declare income of the members which would have remained private under a partnership structure. In addition, LLPs are not entitled to hold GMS or PMS contracts. Accordingly, a practice reliant on such contracts would not be so well-suited to this corporate vehicle unless they are willing to consider setting up a sub-contracting or similar arrangement between the LLP and the holder of the NHS contract. Whilst not necessarily attractive to smaller practices, alternative corporate vehicles may become more appropriate as practices grow.

As practices look to forge ahead with innovative arrangements with other healthcare providers to provide enhanced services and facilities in a cost effective way, they will find that investment involving other healthcare professionals is difficult to achieve through a traditional partnership agreement. The flexibility and scope for investment which LLPs and other corporate vehicles offer are likely to be attractive as practices look to develop and thrive in the emerging post-Covid environment.    

The incorporation process

Companies House keeps a record of all LLPs established in England and Wales and sets out formal processes that apply to incorporation and ongoing administration. The following issues should be considered when thinking about incorporating as an LLP:

• Costs and administration. Incorporation of an LLP involves a number of costs, but these should be relatively small. An incorporation fee applies when registering a new LLP with Companies House and the submission of further documents will in some cases incur further fees, although discounts apply if documents are filed electronically.
• Professional advisers. It is strongly recommended that GPs seek appropriate legal advice (or the advice of another suitable professional) to ensure that registration is suitable to the particular practice and that the relevant process is properly followed, as well as to assist with the preparation of an LLP agreement (see below). GPs may want to consider instructing a professional company secretarial service, which can administer the LLP incorporation and ongoing filings in return for a fee.
• Tax considerations: Tax advice is also vitally important to ensure that tax liabilities are not inadvertently and avoidably triggered, as property passing from the individual partners to the LLP may attract stamp duty land tax, VAT and/or capital gains tax liability if the transaction is not structured correctly. The conversion of a partnership to an LLP may be treated as a transfer of a going concern for VAT purposes and care should be taken if there are any proposed changes to the business or a break in carrying on the business whilst transitioning. The LLP may be able to take on the partnership’s old VAT registration (which may help with transitioning). From a tax perspective, an LLP member may be treated as an employee for tax purposes if specific salaried partner conditions are met (which differs to partnership rules) and there may also be TUPE issues in relation to the transfer of employees.
• Practicalities and formalities. The LLP name must not be the ‘same as’ another business entity registered at Companies House and the name must comply with legal rules, for example those restricting use of ‘sensitive’ words and expressions. There are also statutory rules which set out how and where the LLP name and the names of members must be displayed. GPs should also ensure that the practice is appropriately set up to comply with legal obligations requiring certain information to be available in the public domain. The LLP will also need to be registered with the CQC.

The LLP agreement

In the same way that a traditional partnership is regulated by default provisions if a partnership exists and either does not have a partnership agreement or, where there is one, it is silent in some respect, LLPs are also subject to default provisions. It is therefore important that the members agree on how benefits and responsibilities are to be shared amongst the partners, to avoid being potentially subject to default arrangements that are not appropriate to the practice.

In the absence of specific agreement, the Limited Liabilities Partnership Act 2000 (as supplemented by the Limited Liability Partnership Regulations 2001) (the “Act”) provides as follows (as well as extending to certain other matters):

Benefits/expenses

• All members share equally in the capital and profits of the LLP. Tax transparency is a key feature of the LLP which distinguishes it from other corporate entities. Each individual member is charged income tax on their share of the LLP’s income or gains as if they were members of a traditional partnership.
• The LLP must indemnify each member for payments made by him/her and personal liabilities incurred by him/her in the ordinary and proper conduct of the LLP’s business.
• No member is entitled to remuneration for acting in the business or management of the LLP. (GPs should consider whether salaries will need to be addressed in the LLP agreement or whether this would be better dealt with in employment or consultancy agreements).
• Any member carrying on a competing business without the LLP’s consent must account to the LLP for his/her profits.

Decision-making and management

• Every member of the LLP may take part in the management of the LLP although the Act is silent on the frequency of and the rules governing the conduct of meetings, use of written resolutions and delegation of matters to a committee. For larger practices in particular, the agreement should therefore clearly set out the management and decision making structure and how it is intended to operate.
• An LLP must have at least two ‘designated members’ (“DMs”), whose role is to perform certain duties in relation to the legal administration of an LLP that would, for a company, be performed by the secretary or directors. If no or only one DM is appointed, all members of the LLP are deemed to be a DM.
• Day-to-day business may be decided by majority decision of the members. Any proposed change to the nature of the business of the LLP requires the consent of all members.
• The LLP’s books and records must be made available for inspection by its members at the registered office of the LLP.
• Unlike a limited company, the ownership and management is not split. A member is both owner and decision maker – there are no shareholders and directors. Members are not, save as otherwise provided, subject to the same statutory duties as directors of a company, for example the duty to promote the success of the company for the benefit of its members.

Membership

• No new members may join the LLP, nor may existing members assign their interest without the prior consent of all existing members.
• A member cannot be expelled from the LLP by a majority decision unless the members have expressly agreed that expulsion can be carried out in this way.

These default provisions, including any other rights and duties of the members, can be adapted to suit the practice in question and expressed in a formal agreement between the members, namely the LLP agreement. It is worth noting that this agreement, unlike a company’s constitution, is confidential to the members and does not need to be publicly filed at Companies House. This may be important to any potential members of an LLP who may be concerned about putting too much information in the public domain.

Many GPs will be familiar with the use of a partnership agreement and, even if it is not proposed that the practice should incorporate as an LLP, it makes good business sense to periodically review the agreement and its suitability in view of the status of the partnership and what is considered best practice in the medical profession at that time.

Property considerations

There are a number of difference between a traditional partnership and an LLP structure in relation to property:

• As a separate legal entity, LLPs can hold property in their own right.
• The title to any premises and any funding secured on the premises will be in the name of the LLP, not individual partners, so the retirement and appointment of partners does not directly result in renegotiation of borrowing facilities and transfers of the property. This saves significant administration and legal fees when partners change.
• Given that the liability of the individual doctors who are LLP members is generally limited, the members may lose less sleep at night! Such limited liability may also help attract GPs to the practice.
• Provided certain conditions are met, Stamp Duty Land Tax relief may be available in relation to a transfer of property from the partnership to the new LLP in connection with its incorporation.

Ongoing administration

Although there may be increased administration obligations on GPs wishing to operate as an LLP, it is likely that the practice manager would manage these (even if the DMs will be responsible for these). Updating internal practices will involve ensuring that such information is brought together and submitted in the format and by the deadlines specified by Companies House. Information which must be submitted includes:

• Changes in membership
• Annual accounts (the extent of the information which must be provided will depend on the size of the LLP)
• Changes in registered office
• Details of any securities granted by the LLP
• Confirmation statements (these provide an annual 'snapshot' of information as at the date they are made up, e.g. registered office, members' names and details of where records are kept).

Conclusion

It seems likely that the medical profession is set for a more federated future and smaller practices in particular may wish to explore opportunities to either merge with other practices or to enter into co-operative or federated arrangements to bring together specialist expertise, share overhead resources and take advantage of economies of scale without sacrificing their autonomy. In addition, the increasing commercialisation of the medical profession is likely to inspire more dynamic management structures and possibly greater separation of healthcare provision and management. Opportunities will arise for a variety of different practice structures, but it will be down to each individual practice to harness those which will allow them to reap the greatest benefits for their business and patients. In this environment, investing time to consider the optimum form of practice structure is well worth the effort.