Public image limited

Brokers have a range of options when deciding what structure their company should have. And, as the variety of brokers shows, it could be anything from a sole trader to a multi-million pound company listed on the London Stock Exchange.

Each structure has its advantages and disadvantages. The main corporate vehicles for UK brokers are sole traders, partnerships, limited and quoted companies, or mutuals.

Public limited companies are rare, according to Companies House. The main difference compared to a limited one is that a PLC can offer its shares to the public.

Stock exchange

The PLCS are not necessarily listed on the stock exchange, however. "There are many PLCs that sit in the background and have no intention to list themselves," says Chris Lerway, policy adviser at Companies House.

There are, however, a number of listed PLCs on the stock exchange, governed by City watchdogs, such as the Financial Services Authority.

If a PLC decides to restructure it needs to re-register and complete the necessary documentation. "This is quite an easy process and typically takes about five days," says Lerway.

Another difference between a limited company and a PLC is that PLCS need to meet share capital requirements, including having £50,000 of share capital. Lerway points out that the titles of limited and PLC are not status symbols but are used as a warning to people that the liability of the company is limited. This means investors may not get back all the money they put in if the company collapses.

He explains: "The emphasis is on the limited liability and there is no difference for PLCs and limited companies in this respect. Therefore, if a claim was made the claimant could only go for the money in the company and not personal belongings - unless, for example, they were used as security for a bank loan. For a sole trader or partnership, individuals are liable for the full extent of claims."

In mutuals, everyone shares in the profits and losses, while for sole traders the issue is between them and the Inland Revenue. Some are more comfortable operating as sole traders and see it as a way to have more control over the business.

Limited companies have to be prepared to disclose and to make records public but this rule does not apply to sole traders and partnerships.

Lerway explains: "Anyone can gain access to the company's records through Companies House. If brokers are interested in a particular company, this is a way to find out who is behind the operation, what its structure is, and who the shareholders are. This may be a disadvantage for some companies."

The most common type of structure for brokers is the limited company.

Graeme Trudgill, technical services officer at the British Insurance Brokers' Association, agrees that the most important aspect of a limited company is the shareholders' limited liability.

He says: "The accounts are posted and easily available for any investor or client to see and there is the possibility of raising share capital. The disadvantages are that the directors are often expected to give personal guarantees. Brokers must also consider the cost of necessary accounting procedures, possible fines if accounts are late, and the fact accounts are open to scrutiny from insurers and the FSA. Directors are also answerable to shareholders, which may mean less flexibility."

The second most common type of broker is a partnership, a less formal arrangement than a limited company. This type of structure offers greater flexibility, meaning decisions can be made more quickly, according to Trudgill.

He says: "The downsides are that funding may not be as easily available as to a limited company, and if brokers want to raise a finance partner they may have to put their house down as security."

Sole traders and mutual brokers are less common. The disadvantage of being a sole trader is it may mean difficulty in obtaining agencies. It makes companies more vulnerable and may also mean taking less holidays, says Mr Trudgill.

He adds: "There is no particular trend in the market except the overall move of consolidation. Therefore, we would expect there to be more limited companies long term, as many small brokers are not keen on the choppy waters of FSA regulation."

James Simpson, a principal at Imas, a boutique that specialises in mergers and acquisitions, suggests more companies are transferring to limited status because they are becoming increasingly aware of the importance of limited liability.

"The bulk of the market is limited liabilities, primarily due to errors and emissions," he says. "For this reason, the large partnerships have been transferring to limited status, leaving the smaller partnerships in the market."

He says there is no reason for the majority of companies to become a PLC, as it would offer no advantages unless they want a stock market listing.

"The only reason for doing it would be status, to give an image of the company being larger than it is. It is about playing on the misnomer of what a PLC is."

Several of the largest brokers in the UK are listed PLCs but while they have strong links with the London market, they tend to be listed on the New York Stock Exchange. Commentators suggest this is because there are more insurance analysts and a bigger pool of investment funds in the US.

US story

The NYSE has certainly responded well to the listing of Willis in 2001.

It has seen its share price soar during the past couple of years, despite the fact the broker is headquartered in London and registered in Bermuda.

A main reason the company decided to float was to boost employee share ownership - the broker says that since 2000 the number of employees holding shares in the company has surged from 3% to 70%.

Elsewhere, smaller brokers, such as FM Green, have transferred to PLC status but are not listed. FM Green was originally a sole trader and then a partnership before becoming a PLC. Ian Richens, the group's chief executive, explains: "The reason we went PLC was to enable us to be sold more easily or buy acquisitions more easily. It is normally easier to raise corporate funds as a PLC rather than a limited company."

He continues: "Having PLC on company headed notepaper makes it easier to attract the attention of investors. But we are working well as an independent at the moment and have no ambitions to be bought or to expand in this way. The name of the game is to make profits, not worry about how big the company is."

He points out that tax benefits are another advantage of being a PLC.

He says being a PLC means companies can draw dividends and take a large percentage of salary as dividends, decreasing their national insurance bill.

He explains: "Under a partnership companies have to pay tax on any profits at the end of the year whether they are left in the company or drawn out. The difference is all to do with whether the company is paying individual tax or corporation tax."

For example, he claims that if brokers want to draw a salary of £100,000, of which £40,000 will be as salary and £60,000 as dividend, they can save 12.5% or £6400 national insurance.

FM Green became a PLC in 1997 and Richens has no regrets about the transition.

He says: "We just wish we had made the move earlier. There is no doubt that it is more flexible to be limited rather than a partnership."

Many brokers believe there is little advantage in being a PLC if they are already registered as a limited company. Paul Meehan, group managing director of broker Smart & Cook, says: "Being a PLC would not make any difference to us. Certain people say it gives a company certain status but I don't buy that. We are a private company, not a PLC.

"The main issue for us being a limited company is having limited liability and tax benefits. At the end of the day, we are all in the risk game and this is the best structure for what we do. The limited company environment is transparent and makes sense for us."

Smart & Cook has two holdings companies, under which are five separate business entities that are all private limited companies.

Michael Collins, chief operating officer of the Broker Network, explains that even large companies can be limited if they have a small number of shareholders. The Broker Network trades as a limited company and has approximately 20 members on its share register. Collins says: "This is not because we do not want to expand our shareholder base but unless a company is quoted there is little difference between a limited company and a PLC. The difference comes when you are quoted on the stock exchange but we have no plans to float."

Collins explains that one of the advantages of being a limited company is that it is easier to transfer part ownership of a company in a limited business compared to being in a partnership. He says: "All you have to do in a limited company is buy and sell a few shares. By contrast, partnerships have to deal with issues such as ongoing liabilities and quantifying the partnership's assets."

Stockbrokers' role

He adds that with a quoted company, transfer is even easier because all the directors have to do is phone their stockbrokers and get them to sell some shares on the stock exchange. However, with a quoted company, the directors have no right to say who can and cannot buy shares.

In a non-quoted company there is usually some sort form of provision in the legislation, such as memorandum and articles, about who can buy the shares. Typically, this comes in the form of a special right, meaning they are offered to existing shareholders first.

Finally, Charles Whitfield, marketing director at broker Layton Blackham, says: "It makes sense to be limited and we do not see the advantage of becoming a PLC." The company began as a sole trader in 1984 and became incorporated in 1987. It now has six separate business identities under the one umbrella."

Mr Whitfield says: "It also makes sense to separate the different business identities so they can work in different regulatory environments, such as different accounting rules. It helps keep the different income streams of the business apart."