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Why should GP Practices consider becoming "Limited Liability Partnerships"?

As Part One to this article has already discussed, Limited Liability Partnerships may provide GPs with a suitable (and perhaps preferable) alternative to the traditional partnership business structure. In Part Two, I explain the practical implications of incorporating as a Limited Liability Partnership ("LLP") and how GPs can maximise the commercial and organisational benefits associated with the LLP structure. This draws on the current legal and regulatory position, recent reforms and opinions voiced in discussion with local practices.

The Incorporation Process

Companies House keeps a record of all companies and LLPs established in England and Wales and sets out formal processes which apply to incorporation and ongoing administration. The following should be considered:

Costs. 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 incur further fees, although discounts apply if documents are filed electronically. GPs should also take account of fees which may need to be paid to professional advisors in the course of incorporation and in the future.

Professional advisors. It is strongly recommended that GPs seek both 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. 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 capital gains tax liability if the transaction is not structured correctly. GPs may also consider instructing a professional secretarial service,  which can administer the registration and ongoing filing requirements in return for a fee.

Practicalities and formalities. The LLP name must not be the 'same as' another business on the Companies House register and 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 Partnership 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. In the absence of specific agreement, the Limited Liabilities Partnerships Regulations 2001 ("LLPR 2001") provide default provisions in relation to certain matters. These include the following.

Benefits/expenses.

  • All members share equally in the capital and profits.
  • The LLP must indemnify each member for payments made by it and personal liabilities incurred by him.
  • 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 contracts).
  • Any member carrying on a competing business without the LLP's consent must account to the LLP for his profits.

Decision-making and management.

  • Every member of the LLP may take part in the management of the LLP and subsequently it is unlawful to exclude any member from management decisions: any excluded member is entitled to sue the LLP on the basis of unfair prejudice. The members can agree to delegate some of the management functions to an executive group. In larger practices this is likely to be important but the agreement needs to set out clearly the management structure and how it is intended to operate.
  • An LLP must have at least two 'designated members' (DMs), whose role is comparable to that of a company director. Notably, DMs are also subject to laws regulating the integrity of directors. If there are none or only one, all members of the LLP are deemed to be a designated member.
  • Day-to-day business must 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 at the registered office of the LLP.

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. 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 the medical profession at that time.

Ongoing Administration

As noted in Part One, although there may be increased administration obligations on GPs wishing to operate as an LLP, it is likely that the practice manager would manage this. 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 inter alia:

  • 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 loans secured against the assets of the LLP
  • Annual returns (these provide a 'snapshot' of information as at the date they are made up, e.g. registered office, members' names, details of where records are kept). The tax position of an LLP is the same as a partnership.

Which practices are best suited to the LLP structure?

In summary, practices most likely to benefit from the LLP business structure will be larger practices, in particular those which are expanding and or developing specialist practice areas.  The use of an LLP or a limited company may well provide a much more convenient vehicle for securing access to more extensive investment. I mentioned in Part One that LLPs are not entitled to hold GMS contracts. Accordingly, a practice heavily-reliant on such contracts would not be so well-suited to this corporate vehicle. However, all practices should consider the full range of options available to them in the event that the goalposts are shifted. 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. Whilst not necessarily attractive to smaller practices, alternative structural vehicles may become more appropriate as practices grow.

One practice manager noted that a holding business could be beneficial to her practice as it would allow flexibility in the event that an incoming partner did not want to buy into the property of the partnership. In these circumstances, the traditional partnership would operate alongside the holding business, which may allow the partnership to boost its capital investment by securing sums advanced to the partnership against its assets. As noted in Part One, the recent reforms encourage the establishment of specialist units and so a holding business could provide the means for a partnership to embrace such a development opportunity. Moreover, a partner wishing to leave the practice partnership may nevertheless continue to hold an investment interest and assist with the management of the LLP's assets to the extent permitted and provided for in the LLP agreement.

Another practice in a very rural area of Devon took the very bold and radical step to re-develop its practice premises through a limited company nearly ten years ago. The Company was able to attract bank funding for the development supported by the income streams flowing from leases between the Company and the practice partnership and between the Company and the PCT who use a number of rooms and share the use of other facilities. On a recent visit, the managing partner confirmed that the arrangement had proved extremely useful and beneficial. As the funding and the legal charge securing it on the premises is made in the name of the Company, not individual partners, the retirement of existing partners and the introduction of new partners does not result in significant renegotiation of the borrowing facility and transfers in the property. It is far easier and cheaper to simply transfer shares in the Company. Given that the liability of the individual doctors who hold shares in the Company is limited, the scope and appetite for investment has been much greater without losing sleep at night!

It is interesting to note that this same practice is forging ahead with innovative arrangements with pharmacists. In sparsely populated areas it is extremely difficult to justify investment in either a full scale pharmacy (if a licence can be obtained) or new GP surgery facilities. However, by working very closely together, using to the full the pharmacist's skills and capabilities as a primary clinician supported by an appropriate level of GP presence with joint access to relevant software and records, a much enhanced service and facilities can be provided very cost effectively. This type of innovative investment involving the wider healthcare profession and not limited exclusively to GPs is difficult to achieve through a traditional partnership agreement. The flexibility and scope for investment which LLP and corporate vehicles offer are likely to be very important as practices look to develop to survive and thrive in the emerging post-PCT environment.  

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 totally sacrificing their autonomy. The demands on general practice look set to increase as the trend for care is transferred from hospital to the community. Simultaneously, 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 all natures of practice, 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 legal entity to take forward a practice is crucial and well worth making.

June 2012

Chris Gregson is a Partner in the Commercial Property Team specialising in property work for public funded bodies.  Chris joined the firm in 1981, becoming a Partner in 1989.  He has over ten years practical experience as a FE College Governor. Chris has particular expertise in dealing with the acquisition and disposal of sites for development purposes.

Recent projects he has undertaken include: 
Acting for the Devon Primary Care Trust in connection with the disposal of a major historic   former hospital site in Exeter for redevelopment including lease back and overage provisions; 
Advising on the purchase of sites for 3 new hospitals in Devon;

Ashfords would like to acknowledge the help of Dr Karen Acott of the Wallingbrook Health Group in the preparation of this article.

First published in Practice Management Volume 22 Number 7 July/August 2012George Warman Publications


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