When deciding how to structure your new practice, you have probably focused on the organisational, legal, financial and practical implications. But it is also important to make sure your structure doesn’t lead to avoidable problems, or add costs, in terms of regulatory oversight.
Many first time practices start up as ‘solo’ practitioners (sole practitioners with no staff), ‘sole’ practitioners (with staff) or partnerships. Others may choose, or later move on to, a corporate structure, such as a limited liability partnership (LLP) or limited company.
Principals of a firm are sole practitioners, all partners in a partnership, all members of an LLP and all directors of a limited company. The term also covers any individual held out as being a director, partner or LLP member.
If your firm does not conform to the ICAEW definition of a member firm, you will not be covered by the Practice Assurance (PA) scheme, which includes anti-money laundering (AML) supervision.
There are different requirements to be a member of the PA scheme and to use the ‘chartered accountants’ description. To decide if your firm meets the requirements, review the ‘maintaining your firm’s record’ section of the ICAEW website. The key point is that broadly to fall under the PA scheme, ICAEW members must directly control the practice and to use the ‘chartered accountants’ description, the business must be controlled by chartered accountants.
Start early
“It’s very easy for firms to structure themselves out of being a member firm unintentionally,” warns Janet Hartas, Senior Manager, Quality Assurance, ICAEW. In a small business, for example, a spouse might have equal shareholdings. If the spouse is not an ICAEW member, the firm could accidently no longer conform to the ICAEW definition of a member firm and no longer be covered by the PA scheme.
Where non-members are principals in regulated firms (audit, investment business, insolvency or probate) or in a firm using the description ‘chartered accountants’ ICAEW requires them to be affiliates, which can increase costs. “It’s very important at the beginning to think about the most effective way of structuring,” says Hartas. “Otherwise, you could end up paying more fees than you need to.” Some firms that appoint a spouse as the other principal do so to cover for situations where the main principal may be incapacitated, to ensure a back-up for the bank mandate for example.
“But perhaps they don’t need to be a principal in this case,” says Elaine Griffiths, Director of Regulatory Practice and Policy at ICAEW. “Instead they could have another role, which would mean your firm remains within the definition of a member firm but also has plans for incapacity.”
Resources
For more information on the different types of practice structure, see here.
ICAEW has also produced general guidance on some of the issues you should consider when choosing your practice structure.