More and more law firms are embracing limited liability partnerships and the flexible business model they offer. But publishing results might be one disincentive, says Anita Rice


The number of firms opting to convert from traditional partnerships to limited liability partnerships (LLPs) continues to rise, with a 40% jump in conversions during 2006/07 alone attributed to a greater focus on risk management (see [2007] Gazette, 17 May, 1).



And little wonder, given that LLP status provides for greater protection of partners’ business assets but without the more onerous taxation regime of an ordinary company, as LLPs are taxed in the same way as partnerships.



Since the Limited Liability Act 2000 came into force in 2001, a total of 1,562 of the 8,926 firms registered in England and Wales have opted to operate as LLPs – the majority taking the plunge in the past two years.



Richard Linsell, partnership law expert and a partner at national firm Addleshaw Goddard, acted for ‘big four’ accountants Ernst & Young, which became the first company to register as an LLP on 6 April 2001, and Kemp Little, the first law firm to do so later that year.



The LLP is, he says, rapidly becoming the norm, noting that more than half of the top UK firms are now LLPs, adding: ‘The LLP is designed to fit the needs of a modern, professional firm in the 21st century… and if you are not one, you have to ask yourself why not.’



Perhaps the ultimate sign of this was the decision by Barlow Lyde & Gilbert, the City firm well known for defending solicitors against negligence claims, to convert to LLP status in May. ‘The threat of unlimited personal liability can, understandably, be an unattractive risk for partners and potential partners,’ the firm said in a statement put out to explain the change. However, it reassured clients that they will see ‘very few’ changes in the firm as a result – like most firms, partners will remain known as partners, rather than members. It also emphasised that in the event of having to sue the firm, ‘the LLP is of course backed by substantial assets and professional indemnity cover’.



Mr Linsell takes on the point that LLPs could also have an advantage when it comes to lateral hires, a not-insignificant factor given the current so-called ‘war for talent’. Young solicitors and new entrants to the profession expect to work for, and eventually become partners in, LLPs rather than accept the risks of joint or several liability that go with the traditional partnership business model.



In fact, firms that have not converted could be eyed with suspicion by potential recruits, who may fear, rightly or wrongly, that the practice in question is shy of publishing its results, as LLPs are required to do by law, says John Machell, a barrister at Serle Court Chambers in London and committee member of the Association of Partnership Practitioners (APP).



‘Individual solicitors expect to become partners in LLPs rather than ordinary partnerships and they might worry that the firm doesn’t want to make their accounts public – possibly because they are not making as much money as others expect, or that there may be some hidden liability that the firm is having difficulty with,’ he says.



The flexibility that comes with LLP status is another reason why it is fast becoming the business vehicle of choice for firms. When it comes to succession, for example, because partners in LLPs do not own shares, there is no requirement to sell or buy the shares of a retiring partner.



And there are other, less obvious advantages to the LLP conversion process, says Richard Turnor, a partner at top City firm Allen & Overy, one of the first large international firms to convert.



‘There can be some surprise benefits: you work out exactly what your business is, who your clients are, when your rates were last reviewed, and whether you kept in touch. It is good housekeeping. A necessary side effect of becoming an LLP is that it makes you a tighter ship,’ he says.



And far from being something to automatically fear, Mr Turnor believes publishing results is something firms should positively embrace: ‘If you don’t publish results, you are perhaps missing out on an opportunity to present yourself to the world as an attractive firm to instruct. There is a commercial pressure to publish.’



So with what looks like a win-win situation all round for law firms, it seems more than a little puzzling that the legal world did not witness an immediate stampede to join the LLP club back in 2001. Why not?



Mr Machell points the finger at straightforward lawyerly caution: ‘I think to start off with there was a relatively slow take-up, simply because it was new and solicitors… didn’t want to be the first to go down that route. As more firms have, it has encouraged a rash of firms to follow suit.’



However, it is not just the wait-and-see instinct of the average lawyer that prevented a flood of conversions. All the experts acknowledge that, despite the undoubted advantages of converting, the LLP vehicle is not a panacea for all ills.



Mr Machell says there are many scenarios where teams or groups of partners could be liable – such as allowing a failing LLP to continue trading beyond the point when they could reasonably expect it to succeed. In that scenario, a group could be liable to the liquidator of the LLP.



Also, while there are positives to publishing accounts, there are also definite negatives. Mr Linsell points out that previously firms could suffer in silence if they were going through a rough patch, but not so with LLPs. ‘If you are having a bad time, it would be very public, which is OK if the whole sector is having a hard time but if not, it is going to be a very difficult time for that firm for a while,’ he says.



Another issue for firms looking at converting is that while the financial filing commitments of an LLP by no means match those of an ordinary company in terms of complexity, they are still far more complicated than many expect.



Jeremy Black, associate partner in the professional practices group at accounting firm Deloitte, says many finance professionals within law firms tend to have worked in partnerships for a very long time. Accounting standards have become more complicated over the years, which can come as something of a surprise.



Partners can often be alarmed that they need to disclose information on pension arrangements and the amounts paid to the highest-paid members. Also, it is relatively easy for other firms to calculate fees charged by particular partners as so much information becomes suddenly public.



‘Some firms would be well advised to talk to their accountants first to ask about disclosures and check if there are ones that might make them uncomfortable,’ recommends Mr Linsell.



Firms should carefully consider the pros and cons of conversion before taking the plunge, agrees Mr Black, who believes partners should understand exactly why they are going down the LLP route and what that will entail. ‘What we have done with some firms is draw up financial statements as if they were an LLP so they can see what they would have to disclose and what they would look like,’ he adds.



There are also potential tax complications for firms with overseas operations, where they could face being taxed as corporations.



Meanwhile, some US firms operate their UK branches through US LLPs. Broadly speaking, this means they do not have to file financial statements, explains Mr Black. ‘Some US firms are a lot more sensitive about the information then some UK firms because firstly, in the UK, magazines publish league tables so more information is available generally, and [secondly] some US firms have partnerships where some don’t now what everyone else is getting.’



And while the forthcoming Legal Services Bill, which will allow firms to take on outside investment, might prompt big firms to float, most agree the LLP model will remain preferable to most.



Mr Turnor says that, while the LLP is certainly no a ‘magic touchstone’, it is very useful for those who wish to practise with individual liability and who do not mind operating transparently.



‘A rotten business will be a rotten business whether it’s an LLP or a partnership,’ he says, observing wryly: ‘For myself, it is nice to know that if something awful happens in, say Hong Kong or the banking department, I would lose my business but not my home.’



Law firms registered as LLPs in England and Wales

2001– 26

2002 – 58

2003 – 121

2004 – 190

2005 – 349

2006 – 456

2007 – 362 so far

Total to date: 1,562



Source: Solicitors Regulation Authority