What can you expect on the first day of your exalted new position?
Well, in truth, for most people making the transition, probably little is going to change at a day-to-day level. Unless the transition to partnership is as a result of a change of firm, you’re probably going to be doing pretty much what you’ve been doing for the preceding months and years – your role, your team, and your cases aren’t likely to change significantly overnight. Of course, the support staff will always be happy that there is someone else that they can get to approve bills, payment requests and the like for them.
There may also be an expectation that, going forwards, you will become more responsible for generating work for yourself and your team or take on additional responsibilities within the firm or team such as supervising and developing staff. You will most likely be given time to “grow” into the role over time.
What may well change, depending on what sort of partner you have become, are the less obvious things like employment status and tax treatment. These are important factors that need to be considered before deciding whether partnership is right for you.
Employment status and tax treatment
In some firms, “partner” is just another job title. Although a partner to the outside world, the individual may very well remain on the payroll as an employee, most likely at a fixed salary and with few (if any) voting rights, and no capital invested in the firm. As a junior salaried partner in this situation, little will change from what you have been used to in terms of employment status and tax treatment.
If the firm is a limited liability partnership (LLP) or true partnership, a new partner will most likely join as a fixed share equity partner. The biggest change for most people will be that this requires them to cease being an employee and become self-employed. This has to be notified to HMRC within three months of the change of status and will mean that the new partner no longer pays tax monthly via PAYE but has to complete self-assessment forms and deal with their own tax affairs. You are required to pay income tax twice a year, on 31 January and 31 July.
The rules relating to the tax treatment of the newly self-employed are quite complex, and it may be that the first time you are required to pay any tax is quite some time after actually becoming a partner. It is important to take advice on the potential tax payments for your particular circumstances and make the necessary provisions for making the payments.
Some firms will retain money from drawings in order to pay tax on behalf of the partners, while others ask the partners to pay their own tax bills. You need to be clear about how this will be dealt with in order to know what provision you need to make.
Investing capital
New partners in LLPs or true partnerships will almost certainly have to put capital into the partnership. A capital contribution is in effect a loan to the business and would be due back to you on exit. A member of an LLP, for instance, has to invest a minimum of 25% of their initial drawings. Consideration, therefore, needs to be given as to how that capital can be raised - though the firm may well have a facility with its bank for new partners to borrow capital to introduce.
While partnership can undoubtedly mean an opportunity for increased reward, it also has to be remembered that it can also create risk for the individual. That personal risk depends on the particular circumstances and the structure of the firm.
If joining a traditional partnership, the worst-case scenario is that all of your personal assets could be at risk - including your family home. If the firm were to become insolvent, as a consequence of poor financial performance or a negligence claim that exceeded the professional indemnity insurance cover, the default position is that all individual partners have unlimited joint and several liabilities.
For an LLP, the risks are reduced - typically to the level of investment you have made in the business. This investment could be capital or current accounts, directors’ loan accounts or undrawn profits. Your personal assets should be protected, though there are clawback provisions which could reduce that personal protection – particularly if you have taken funds from the business whilst knowing it was in financial difficulty.
Partners generally have longer notice periods too. As an employee, you’ll probably have been used to a three-month notice period being the norm. For partners, the period is generally longer – typically not less than twelve months. It is also not uncommon for post-termination restrictive covenants, seeking to limit an outgoing partner from competing or dealing with certain clients, to also be more onerous than comparable restrictions on an outgoing employee.
Final thoughts
Being offered partnership is undoubtedly an achievement, and it should be celebrated as such. It is important though that anyone offered partnership goes into it with their eyes open and properly understanding the implications of accepting the offer.
About the author: Mark Turner is Partner at Butcher & Barlow.
