Choosing a Legal Structure for a Growing Consultancy
Three freelance IT consultants currently operate as separate sole traders, each earning around £70,000 a year. They want to formalise a joint venture to bid for larger public-sector contracts that require a single supplier with combined turnover of at least £200,000. One partner wants to keep decision-making informal and split profits equally. Another is worried about personal liability if a project fails and a client sues. A third wants to be able to bring in new investors within two years. They have asked you to recommend a structure. They have modest capital (£15,000 each) and no desire to list on a public market. They are also concerned about the administrative burden and the public disclosure of individual partners' earnings.
1. Compare a general partnership and a private limited company for these three consultants, focusing on liability, administration, and ability to raise investment.
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General partnership:
- Liability: Partners have unlimited joint and several liability, so the partner worried about being sued personally would not be protected. This directly conflicts with one stated concern.
- Administration: Low - no statutory filing beyond tax returns, and profits can be split flexibly. This suits the partner wanting informality.
- Investment: Raising outside capital is difficult because there are no shares to issue; new investors would have to become partners, diluting control and exposing them to unlimited liability.
Private limited company (Ltd):
- Liability: Shareholders have limited liability, protecting personal assets - addressing the litigation concern.
- Administration: Higher - annual accounts filed at Companies House, confirmation statements, and directors' duties. Some financial information becomes public, though individual earnings need not be disclosed if structured as salary/dividends.
- Investment: Shares can be issued to new investors without a public listing, directly meeting the third partner's goal.
Judgement: The Ltd company best balances the stated priorities (liability protection and future investment), at the cost of more administration and some public disclosure.
2. The partners are also worried about public disclosure of their individual earnings. Explain how a limited company structure affects disclosure, and whether it fully resolves their concern.
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A limited company must file accounts at Companies House, which are publicly available. However, the level of disclosure depends on size. A small company can file abridged or filleted accounts, disclosing the balance sheet and limited notes but not a full profit and loss account or individual directors' remuneration in detail.
What is disclosed: the company's total turnover (in some filings), net assets, and the number of employees. What is generally not disclosed publicly: each director's individual pay. Directors' remuneration is aggregated in the notes to the full accounts, but small companies filing filleted accounts may omit the profit and loss account entirely.
So the structure largely resolves the concern about individual earnings being public, but not entirely: the company's overall financial position and the aggregate pay of directors may still be visible. The judgement is that a Ltd company offers materially more privacy on individual pay than the partners fear, provided they use the small-company filing exemptions - but they should not expect total confidentiality of company-level figures.