Blended Legal Form

The idea or knowledge that there are different forms of legal entity is assumed here. Businesses can exist as sole-traders, owner-directors of a limited company, partnership, limited liability partnership, charity, companies limited by guarantee, community interest groups, co-operatives and public limited companies for example.

That you know what each is and does is not what this article addresses. Generally in our current business psyche and modern economic construct we find that a legal entity takes on ‘one form’ – it exists as singularly one of the above or mainly one of the above. The reason why this happens is anything from "how the business was set up" to "for tax reasons". This article makes the case that a sustainable business to be handed down from generation to generation, implied in the picture above, will best grow from the mindset of a flexible organically evolving blended legal form – that is a composite of any or all of the above legal forms.

Natures and motivations

For any entity that wishes to become a ‘sustainable business’ the key driver of organisational legal form should be ‘long term natures and motivations’. Whilst it is true that people must learn to ‘separate themselves from the business’ or 'work on the business and not in the business', so the legal form needs to be ‘purpose aligned and people friendly’. Teachers, enablers and experts tend to work best in small groups in a collegic or partnership form that is why accountants, lawyers and the bigger consulting firms have adopted ‘limited liability partnership’ legal forms. This is an example of how ‘nature’ drives legal form. Charities and charity law protects intention and activity inperpepuity so long as there is continuous activity. Religious organisations have typically used the charity form for their activities. Charity law also has huge tax advantage. This is an example of how ‘primary motivation’ with a ‘tax sweetener’ drives legal form.

The problems with single legal form

At an economic level the argument might be that all people and entities can find each other and work together in an agreed relationship and on agreed trading terms. Let charities be charities, businesses be businesses and partnerships be partnerships. But let's understand some basic human wisdom based on our natures; the legal professional will tell you that a joint venture relationship lasts on average for 3-4 years. It is not sustainable. A limited liability partnership operates well with up to 12 of the right people. After that leadership becomes a functional need and an issue. Corporate entities have naturally housed scale, but relationship complexity and breakdown become an issue above about 500 people even with competent leadership. In single legal form thinking a group of 12 lawyers, 2 entrepreneurs and a 600 person corporate business would all be ‘employed’ in one limited company. However, 614 people would not all ‘be happy’ and ‘performing’. Blended legal form would help to cut out a lot of unnecessary policy and procedure needed to maintain one entity unnaturally, where innate functional purposes and personalities cannot be changed and should not be tinkered with. The simple example being that there aren't many families in the world in which you find a policy and procedures manual; it all gets sorted on the hoof.

The second reason why single legal form is an issue is that ‘money’ is likely to become the king. If money is invested in a single legal entity, those who own it, argue its way to the top and link decision making to shareholding. The breakdown of systemic leadership decision making is directly linked to shareholder and centralised power and decision making. In a single legal entity or corporate model this is inevitable. Our businesses end up like Animal Farm in the book by George Orwell.

The blended legal form alternative

In Blended Legal Form thinking a group company which could be owned by a charitable trust, a family trust or by shareholders, or by a mix of all of them could have;

1)      part-ownership of a limited company with the entrepreneurs as directors

2)      corporate responsibility for a limited liability partnership with 12 experts in it

3)      a wholly owned subsidiary with 500 people focused on one client base and trade making trading profit

4)      a part owned management partnership subsidiary with 100 people in focused on another trade.

In this blended legal form an investment of capital for expansion in the 500 person business could be by a loan only to that subsidiary and not through the group company. Likewise the arrival of a third innovative entrepreneur into the part-owned entrepreneurial seed company could be with the granting of shares only in that subsidiary. The limited liability partnership of experts could contribute a management fee or say 10% of income to the corporate group company but be left to its own devices. Other than a decision maker on the Group Board, each blended entity gets on with focusing on its own purpose and focus. The reason why all entities would exist in this group still has to be for some agreed common purpose and with synergy not otherwise obtained if trading at arms length.

Summary

The mindset of a blended legal form is the fundamental mindset needed to grow a sustainable business and not end up in the corporate dead-end of scale and debt with the ultimate break-up, referred to in previous articles as the ‘Roman Empire’ effect. This format allows for evolving independence and responsibility with the principle that an entity within an entity either grows or withers on the vine.

Enrichyou’s Director of a Sustainable Business Programme looks at your businesses legal form in the short and long term based on your raison d’etre.  Please contact us for more information.

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