Chapter 18 Guidance to answering the practical exercises

Q1. What are the main reasons why someone would choose to set up in business as a sole trader rather than a limited company?

Although setting up in business as a limited company offers the protection of limited liability (whilst a sole trader is liable for all the debts of the business) there are still a number of reasons why someone should choose to run their business as a sole trader initially. Remember that over 25% of all law firms are run by sole practitioners. That is a significant proportion, so knowing about this type of business structure is important part not only of general commercial awareness, but your awareness about the legal profession. The main ones are listed below:

• A sole trader retains control of the business, and thus controls the assets of the business and business decisions and management.
• A sole trader does not have to share the profits of the business.
• A sole trader can simply ‘open the doors’ and start trading. There are no formalities or administrative steps to comply with, e.g. registering with Companies House. All the owner has to do is inform HMRC that he/she intends will be self-employed. This makes start up comparatively inexpensive. Once the business is up and running there is less ‘red tape’ and there are no reporting requirements or filing accounts.
• It is a good (and comparatively inexpensive) way to test the market for the business. If it proves successful, or as the business expands, it is easy to change the legal structure of the business, by taking on a partner or forming a limited company.
• There can be tax advantages, even if the business makes a loss, which is often the case with a start-up business. There is no distinction between the tax affairs of the business and the owner’s personal tax affairs. Thus if the business makes a loss, that loss can be set off against any personal income which the owner has (such as interest from savings, dividends, rental or other income). In addition, individuals who are self-employed pay lower National Insurance contributions.
• Do not make the mistake of thinking that a sole trader must run the business alone. A sole trader can still employ people, and, being responsible for the management, is able to choose his employees and those he works with.

Q2. What is an LLP? What are the advantages and disadvantages of these?

As many professional firms are now structured as limited liability partnerships (LLPs), it is essential that you understand what an LLP is and why, in particular, lawyers chose to conduct business under the umbrella of an LLP.

As you saw from the reading, an LLP is a cross between a partnership and a limited company. LLPs were created by the Limited Liability Partnerships Act 2000 in response to pressure from professional firms for a structure that offered more protection from liability than operating as a partnership. Like a company the LLP is a corporate body with a separate identity from the partners (or ‘members’) and like shareholders in a company, members have full limited liability.

The result is that an LLP has many of the same advantages enjoyed by both companies and partnerships, and some of the same disadvantages, although it is probably fair to say that the advantages outweigh the disadvantages. These include:

Advantages:

• Like a company, the main advantage is limited liability for the members. Unlike an ordinary partnership, the members are not liable for the debts of the partnership, or for the debts of the other members.
• An LLP is comparatively easy and cheap to incorporate at Companies House. It can be done in a day! As at January 2020, on-line registration costs £20. (Source: Companies House) There are relatively few formalities and there is no need to file the partnership agreement. All that is required is that there are two or more members.
• Like a partnership, the members have considerable flexibility in deciding how the business is run and managed, and members share in management decisions. Unlike shareholders in a company, they have control over the assets of the business and can decide how these will be owned, and how profits are to be shared. Any changes to this can be decided by agreement between the members.
• There can be some tax advantages, e.g. the members are self-employed, and pay lower National Insurance contributions, and like sole traders or partners they can offset losses of the business against other income.

Disadvantages:

• Unlike an ordinary partnership, there are registration requirements, although as we have seen, these are not particularly onerous.
• LLPs do not enjoy the same privacy (especially in relation to their finances) that partnerships have. Like a company, they must file annual accounts and returns with Companies House, and must notify any changes in the details of the members. This inevitably introduces extra costs.

Q3. Research a company of your choice on line. What are its vision, mission and values?

Having done your research, it would be useful to think a bit more about the results. The vision, mission and value statements of a company are intended to portray to the world its “essence”, as well as guiding its operations. Were you surprised by the results of the search into your chosen company or did you think that these reflected what you already knew about the company?

A topical issue at the moment is the environmental impact of fossil fuels, so, it is interesting to look at one of the multi-national oil companies, such as BP. If you look at the BP company website as an example, you will see that BP does not in fact have a vision or mission statement as such, but the site explains: “What we do” (which could be interpreted as the equivalent of a vision statement). The section entitled “Who we are” includes “Our strategy” could be seen as a mission statement. The section entitled “Our values”: http://www.bp.com/en/global/corporate/about-bp/company-information/our-values.html

BP explains “As our business transforms itself in step with the world we serve, our five values provide a fixed point of reference for the way we operate and behave. They focus our peoples’ spirit of invention and purpose.”.”.The five values are “Safety”, “Respect” (including respect for “the world in which we operate”), “Excellence”, “Courage”, and “One Team”. Have a look at these, and in the light of what you know about the company, think about whether these are what you would expect in the light of topical environmental issues. 

Q4 What do you think are the main advantages and disadvantages of social media sites for businesses?

This is a very general question. The growth of social media has been exponential in recent years. It’s difficult to overestimate the advantages of social media as a tool to place a business ‘out there’ and bring as many clients or customers as possible in. However, the advantages and disadvantages will differ depending on the type of business.

As you will see in Chapter 20, law firms are businesses. Traditionally, lawyers have been sceptical about the use and concept of social media. Lawyers also worry that confidentiality issues may arise as a result of using social media. There are, of course, conduct considerations, but these are not insurmountable, and attitudes are changing. The Law Society’s practice note Social Media gives advice to firms on the use of social media https://www.lawsociety.org.uk/support-services/advice/practice-notes/social-media/. You would be well advised to read this.

Social media offers immense marketing potential. In 2019, the were nearly 3.5 billion active social media users worldwide, an increase of 9% over the year. 45 million people in the UK (67% of the entire population) are using social media. Most log into their accounts at least once a day. (Source https://wearesocial.com/uk/digital-2019 ).

Below are just a few of the advantages which you may have come up with:

• Increasing brand awareness;
• Reaching out to wider audiences;
• Placing content in front of the correct audiences, e.g. blogs, press releases, tweeting news etc;
• Networking and nurturing existing “soft” clients/customers;
• Market research opportunities;
• Customer engagement;
• Customer service and support;
• Establishing “thought leadership”, by sharing information and showcasing expertise;
• Gaining a competitive edge, and insight into other similar businesses;
• Improving the business’s ranking on search engines;
• Identifying and recruiting candidates for job vacancies.

Although social media is an excellent way of expanding a business, there are disadvantages. Here are a few that you may have thought of:

• Cost in terms of investment and time;
• Daily monitoring and regular updating needed;
• Qualified personel needed;
• Additional resources needed to monitor and manage online presence;
• Open door for negative feedback or bad publicity;
• Inappropriate behaviour, e.g. trolls, harassment and bullying;
• Privacy and security issues;
• Giving competitors access to your business

Q5 Research a law firm of your choice online. Use the SWOT analysis to identify strength, weakness, opportunity and threat for that firm’s business.

Obviously, the answers here will depend on the firm which you chose. (It would be useful to choose a firm that you would consider applying to). Perhaps it would be more useful to think about why we have asked you to carry out this task. SWOT is a useful tool for businesses, but as you have seen it has multiple applications. It organises information. When you go for an interview, you need to thoroughly research the firm or business. Using SWOT can be extremely helpful. If you have carefully thought out the strengths and opportunities for that business, this will help you answer the interview questions: “Why do you want to work for this organisation?” or “Why did you choose this firm?”. At this stage it is probably best not to launch into your considered opinion of all the weaknesses you have identified, but thinking carefully about these will help you to decide whether you are making the right choice. Finally, thinking about threats will help you answer another of those questions: “What are the main challenges facing the legal profession (or other business) today?” (see Chapter 20).

Let’s look at an example; a solicitor, a sole practitioner,has practiced for over 30 years in a provincial high street firm. Although his firm has a website and uses traditional advertising and networking to increase its client base, it makes very limited use of social media. The firm relies on its reputation, and its traditional service and established client base. The firm’s technology is outdated. The last few years, however, have been difficult. Traditional markets are falling away, many of the local firms have merged with larger provincial firms and new entrants into the profession meant that smaller firms like this one have struggled to attract and retain clients, who are looking for an innovative, up-to-date service, and qualified staff, who find the working methods of the firm increasingly outdated.

Even on the limited facts that you have, you can immediately identify one or two of each of the SWOT “ingredients” which you may have come up with: