More legal practices are forsaking the partnership model in favour of the limited company. Jon Robins asks if the benefits compensate for the loss of the familiar practice structure.


The publication of the Law Society’s annual statistical report last month revealed the beginnings of a trend within the profession to shun the old-fashioned partnership vehicle in favour of new-style bright and shiny corporate vehicles. While the statistics showed a continuing, if slow, decline in the number of overall partnerships, now dipping below 9,000 firms, the number of ‘incorporated’ firms had more than trebled between 2001 and 2006, from 284 to 941.



‘The debate about the post-Clementi world is finally getting to lawyers,’ reports Roger Zair, head of professional services at accountants Grant Thornton. ‘It might not be until 2008 before the legislation becomes effective, but people are already thinking about their practice, how it works, and how their business should look in that context.’ While much of the increase can be accounted for by the rise of the LLP since the Limited Liability Partnership Act came into force in April 2001, there is a growing number of legal practices going the whole hog, ditching partnerships, and favouring the limited company structure.



Many of the firms that have taken the plunge work in those areas of legal services that are easily commoditised. ‘The Legal Services Bill has made people realise that firms do lots of things that aren’t strictly legal services, such as claims management or debt recovery,’ explains Mr Zair. ‘It is believed that those types of commoditised services only truly work if you can do them in volume.’ He argues that firms which opt for that approach need to invest heavily in IT as well as introduce ‘a very pyramidal structure with a few people at the top and a lot of people below sitting in front of screens’.



He adds: ‘In other words, it is ideally suited to the corporate model, with a small board of directors and a lot of people working at their desks.’



Not all the new limited companies operate in the area of volume legal services though. ‘We are a completely different model,’ says Kevin McGuinness, who set up the intriguingly-named Sabretooth Law Ltd in 2004. ‘We do mainstream corporate finance work and some company law.’ Prior to Sabretooth, Mr McGuinness was an equity partner at City practice Nicholson Graham & Jones (as was) and says he set up his company ‘with an eye on Clementi’ to take advantage of the opportunities that that might open up to finance expansion and because of ‘the likelihood of a consolidator appearing in the marketplace’.



‘Law firms have historically been unfairly treated when you compare us to our corporate customers and the ways in which they can access capital,’ reckons Mr McGuinness. ‘As a partner at Nicholson Graham, we either had to borrow money from partners or from the bank – whereas, ironically as a corporate lawyer, I spent all my time advising clients on the various different ways they could access capital finance.’



So what are his ambitions for Sabretooth? ‘What we are looking for, without wanting to sound like we’re aiming too high, is a firm like Goldman Sachs,’ says Mr McGuinness. ‘Now Goldman Sachs isn’t going to buy Linklaters but they might buy a nice, small-size, high-quality boutique law firm. So that’s where we want to be.’



The name for the practice was the result of a suggestion by a client ‘over a beer’. The solicitor recalls: ‘He said he always fancied the name. I woke up the following morning with a thick head and thought, “That doesn’t sound too bad and is a bit more memorable than McGuinness & Co”.’



Jeff Zindani, a former partner at national firm Russell Jones & Walker, set up Birmingham-based personal injury specialists Forum Law around the same time. It has ten staff and four lawyers. ‘To me it was more attractive for outside investors to see Forum Law as a limited company,’ he explains. ‘There is no mucking around with a limited company. I am managing director with shares. It’s not like they are taking on a typical law firm with equity partners and the partnership structure to contend with. They haven’t got the right business vehicle and will have real difficulties post-deregulation.’



So why opt for a limited company over an LLP? ‘One of the principal reasons is because you cannot float an LLP but you can float a limited company,’ replies Douglas Preece, a partnership law specialist at City firm Fox Williams. ‘If there is an increasing trend of incorporating, then one reason is because the principals concerned have got an idea that they’re going to make use of outside capital. Certainly, investors that we’ve spoken to have said that investing in an LLP isn’t something they’re comfortable with. They are a lot happier to put money into a limited company where they understand the structure.’



Mr Zair points out that prospective investors appreciate the transparency afforded by corporate structures which require the publishing of accounts. ‘It’s much easier on a standalone basis to see how good a business is in terms of its profit and loss account,’ he adds.



Mr Preece suggests the limited company could also be an attractive option for larger firms looking for serious investment. ‘We’re waiting to see the final details of the Legal Services Bill, and what sort of structures are going to be authorised, but it seems that the most efficient structure for larger firms will probably be the limited company or PLC that owns the LLP so that the partnership can continue to trade and so individual members can take out profits in that way.’



So far, he has mainly advised start-ups as opposed to partnership conversions. For the latter, there is, as well as the expense of restructuring, the possibility of a double tax hit. ‘In a limited company, the profits of the company are taxed before there is a distribution to the shareholders and the LLP works out as more tax efficient in that respect,’ he explains.



A compelling reason for setting up as a limited company for Mr Zindani is limiting the liability. ‘I set up the firm five years ago before the litigation over The Accident Group started,’ he says. ‘Now look what’s happening. You can see that the insurance industry is out to get personal injury law firms and there is a form of economic bullying going on. Personally, I have no problems and my liability is limited, so I can sleep at night.’



Many lawyers starting up legal practices from scratch believe they might as well opt for the limited company model. ‘We didn’t have a history of partnership and, therefore, we thought that we would look at the most appropriate corporate structure in which to develop our business,’ explains Ben Lundie. He set up E2 Legal with Katie Ashworth to provide specialist legal advice for the renewable energy sector from Cornwall. ‘We’re both corporate lawyers by training and regarded the idea of a limited company as a far better bet than an LLP or another form a partnership,’ he explains. ‘We did it to protect our assets but also to have a corporate structure that our clients would understand.’ He also points out that the model offered them a favourable tax situation.



Tax is the factor which has traditionally discouraged incorporation. Mr Zair explains that for the last two years there has been a nil-rate band of corporation tax up to the first £10,000 and a 19% rate up to £300,000. ‘If your need for drawing isn’t that great, you may pay yourself a smallish level of salary, leave your profit in the company, and pay a relatively low level of corporation tax,’ he explains. ‘There is a level of profit for small practices where there are some advantages in going into a corporate structure.’



However, Mr Zair notes that some of that tax advantage is likely to be eroded by last month’s Budget. He also argues that for practices with three or four principals, ‘the mechanics are just going to become too difficult’.



The business case for setting up a limited company holds true in the legally aided sector as well. Nottingham-based Paragon Law was set up in 2003 and employs 14 lawyers and a total of 30 staff. Legal aid accounts for 76% of the firm’s income. Managing director Thalej Vasishta explains that their choice of structure is not about limiting liability. ‘Most people when they start a new business have to sign director’s guarantees anyhow,’ he points out.



Instead, the corporate structure is about enabling future expansion for the bigger legal aid firms as envisaged by the government and the Legal Services Commission under the Carter reforms. Mr Vasishta explains that the firm’s ‘five- to ten-year’ plan is to expand geographically and to diversify. ‘The limited company structure allows us to set up a parent/subsidiary arrangement,’ he says. The firm has set up an office in India employing six staff; two are being trained in UK immigration law and others provide dictation services, which, if it grows, would become a subsidiary. ‘If we decide to open up the Leicester or Derby office, each can be done through a separate subsidiary,’ he explains.



Do his lawyers miss the traditional career structure of the partnership? Apparently not, he explains: ‘If you become a director, you’re going to be the equivalent of salaried partner; in other words your name is on the letterhead and you’re jointly and severally liable with the other directors. If you become a director and shareholder then you are like an old-school equity partner.’



Jon Robins is a freelance journalist