Reorganising Legal Practices

Some lawyers will have already converted their practices from partnership to a limited liability practice or LLP. Basically, that still allows the flexibility of a partnership arrangement but with the benefit of limited liability provided you structure things correctly and can avoid the requirements for personal guarantees from bankers and / or landlords.

What we are now increasingly seeing is more practices, whether they are partnerships or LLPs considering the incorporation route. In effect, that is transferring the practice into a company that the partners own.

It is true that often the initial driver behind considering such conversions can be the desire to pay less tax. However, in our experience, practices that move forward and adopt this route are looking for more than simply the potential taxation benefits.

A corporate structure offers the chance to make fundamental changes, to introduce a genuine distinction between those who own the practice (the shareholders) and those who run it (the directors). It can assist in formalising a management structure that is fit for purpose.

A defined corporate structure can also help in attracting and retaining key members of staff. They can be given specific classes of shares which can have defined profit rights for particular areas of work. A company can put in place share option schemes as incentives and remuneration structures that you cannot operate in a traditional partnership.

In our experience fundamental events such a mergers or the retirement of one or more partners are proving to be a catalyst for firms considering their structures. The latest structuring development is the Alternative Business Structure or ABS. At this stage, the numbers of ABS businesses are relatively small. Some 450 firms have started the application process for ABS status with less than 100 organisations being given licence to trade so far.

The key benefits of having ABS status are relevant where law firms are looking to offer a number of different disciplines. In particular, we have seen legal services, claims management and other services being provided to insurance clients through the ABS route. An ABS permits non-lawyers to access an ownership role in the firm. This can assist with the funding and management of a practice. It can take away some of the financing constraints of a traditional partnership or LLP. The ABS model provides firms with the ability to raise funds by offering shares in the business.

Ultimately, what structure is best for your practice is still very much dependent on the type and scope of legal services you provide, where your clients come from, and the skills, ability and aspirations you have. Incorporating the business into a company or establishing an ABS certainly is not the answer for everyone, but simply sticking to the traditional partnership format may not be the best route for a large number of firms.