Why should professional services businesses consider equity incentives?

Challenges to the LLP model

The traditional LLP structure faces many challenges. These, in part, stem from the shifting tax landscape where increasing income tax and National Insurance rates, combined with falling corporation tax rates, can make it significantly more cost-effective to fund working capital in a limited company structure. Many of our clients in the sector also report increased challenges in dealing with generational shifts in their workforce, with greater reluctance to commit the high level of capital to the business that the traditional LLP equity partner model typically demands.

Attracting, retaining and motivating talent in professional services businesses

As people businesses, the key to the success of any professional services business is the hiring, retention and incentivisation of talent. 

Reward in the sector has of course traditionally been a model of salaried employees, receiving relatively minimal bonuses, working towards the ultimate goal of partnership. For professional services businesses that have made the move to a corporate structure, this opens up the possibility of using shares as a means of incentivising employees. Not only does this create alignment between employees and the business owners, it allows for the use of the various tax-efficient forms of incentive arrangement available to limited companies.

Many professional services businesses we work with are, therefore, now supplementing traditional bonus schemes with carefully-focused equity incentives, which encourage individuals deemed critical to the future success of the business to buy into the long-term journey. Some choose to focus their incentives on key employees, whilst others offer all-employee arrangements.

How equity incentives can support the growth of your professional services business

To be effective, it is critical that equity incentives are designed carefully to ensure they fit with the firm’s strategy and the outcomes desired by shareholders. Shareholders are often, understandably, reluctant to see their holdings diluted. However, we often structure plans to protect the current value of the business for existing shareholders, whilst entitling employees to share in the future growth of the business in which they will play a significant part.

Employee Ownership Trusts

A step beyond the equity incentives structures discussed above is the use of an Employee Ownership Trust. This structure allows existing shareholders to sell a majority stake in the company, for market value, to a trust to be held on behalf of the employees. Government tax breaks means this can be done with a 0 per cent tax rate for the selling shareholders and allow employees to be paid bonuses of up to £3,600 per year free of income tax. 

The Employee Ownership Trust structure is becoming an increasingly popular choice in many sectors of the economy, including professional services businesses. It offers an alternative succession route for existing owners whilst giving the firm a key differentiator in the competitive employment market.

Please contact Martin Cooper, Corporate Tax Director, for further details on how we can help you shape an incentive arrangement to drive the next stage of growth in your business.