The most common pitfalls of Local Authority Trading Companies – Structure

by Barry Gostling

 

Over the course of the last few years most if not all local authorities have considered or created wholly owned Local Authority Trading Companies (LATCO’s).

These LATCOs have normally been created to service specific needs within the community or to create a good investment vehicle which can return profits and dividends to the council in future

Having been involved with numerous LATCOs experience has shown that these companies often suffer from the similar challenges and many of those challenges are made trickier due to a lack of planning or understanding of the ultimate goals for these companies or the private sector environment in which they will exist.

So, what are these challenges and what potential lessons that can be learnt from the pitfall’s others may have fallen into previously?

If one word could sum up where pitfalls have most often been encountered, it would probably be ‘Structure’.

  • Structure of governance (i.e. how the LATCO will be run, how much autonomy it will have from the council etc)
  • Structure of funding
  • Structure of the ultimate commercial intentions for the LATCO

There are many options for how a LATCO can be created, the question of whether a company limited by shares, a company limited by guarantee, a community interest company or even a charity is a fundamental one to answer before anything is created. Each of these options will be more or less appropriate depending on what the LATCO will actually do and what the council wishes to achieve. Therefore the 3 points about need to be addressed simultaneously at the very start of the creation process.

One of the most common pitfalls in creating a local authority trading company is not to consider the structure of the entity at the very beginning but merely ‘lift and shift’ the activity of an existing council department into a new entity. There are vast differences between operating under the auspices of the local authority and carrying out the same activities as a LATCO. These differences might arise for example in:

  • VAT
  • Insurance requirements
  • Procurement regulations

All of these, and more need to be considered at the start of a LATCO’s life, failure to do so often leads to an inappropriate structure being created if not for the present but for future aspirations.

The challenges and potential pitfalls that exist can normally be successfully dealt with and a structure created with transactions most efficiently structured if the creation process includes experienced understanding of the relevant issues.

Author

Barry Gostling

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