As Lawrence Graham becomes the latest law firm to jump aboard the limited liability partnership bandwagon, Lucy Trevelyan talks to practices about the allure of the LLP

It has been four years since the introduction of the Limited Liability Partnerships Act 2000 allowed for the creation of a new legal entity which, once registered as an LLP, is liable to third parties rather than its members, but is still taxed as a partnership.


The number of law firm LLPs is still in the low hundreds (there are around 8,500 private practices in England and Wales) but it is growing rapidly as law firms leave behind the days when, because of unlimited liability, they were seen as so-called deep pocket defendants. It is noticeable that start-up firms are almost all LLPs now.


Richard Linsell, partner at the London office of Mayer Brown Rowe & Mawe, has led more than 20 LLP conversions for construction, accounting and law firms - including helping Ernst & Young become the first UK LLP and Kemp Little LLP become the first solicitors’ practice to use the LLP law. His own firm made the switch in 2002 and he says the benefits of LLP status are numerous.


He says: ‘There is the obvious benefit of limiting the liability of partners but there is also a view emerging in the marketplace that it is important to getting and retaining staff. It’s seen as something modern and vibrant and young people want to be part of an LLP.’


Richard Baxter, a partner with Guildford-based Stevens & Bolton, says it was important to his firm to be seen to be progressive.


‘LLP status will become the norm and without it recruitment and retention of high-quality staff and partners might be harder. We also found conversion a convenient point at which to review our overall approach to risk management, which has helped with our consistency of approach on this across the firm.’


Bill Richards, senior partner at City firm Lawrence Graham, agrees that the idea of having no personal responsibility was an attractive prospect.


‘In time to come, it will certainly help departing partners sleep more easily. At the moment, when they leave the partnership they are not off the hook for six years, which is a long time to have claims hanging over your head. Touch wood, there has never been a catastrophic claim in the law firm industry - but it wouldn’t be great to be the first.


‘I know from experience that it can help with recruitment. One of the people we’re talking to asked me whether we were going to do it [convert to an LLP]. I asked him if it was material in his considerations and he said it was.’

Richards: "seatbelt syndrome"

Mr Richards predicts that what started as a trickle of LLP conversions in 2002 is rapidly becoming a flood - but the need to present public, audited accounts means some law firms will never convert.

He says: ‘One senior partner of a major firm says they will never convert because of the requirement to have a proper audit, and true and fair accounts, and have them publicly available. I was surprised at that. We have had our accounts properly audited for some time and most larger law firms’ are made public anyway - they are not giving up much.’


Mr Linsell agrees that some firms will shy away from LLP status because they have been giving figures to journalists for several years that may not be strictly true.


‘Firms tend to exaggerate a bit. The question is, are you prepared to have clients and staff see what you earn? Some firms are nervous that their clients are going to think they’re too successful and charge too much. It’s very difficult. Some have even shelved their LLP plans because of this. Yet in my experience, clients like dealing with successful firms.’


He says more firms are thinking about converting or are in the process of doing so - those involved in US partnerships, he says, are particularly advised to form a UK LLP.


‘The US is very litigious and although claims against law firms are quite rare, it’s a bit of a risk to go into a US partnership and then get sued for something that happened in Texas. I would be surprised if any US law firms will not become an LLP here - the UK LLP is more robust in limiting liability than a US version.’


Mr Linsell says that although LLPs have considerable advantages for many law firms - particularly the ability to offload their liability onto the body corporate - it is not yet certain that individual members are completely off the hook.


‘One of the most uncertain areas is the question of whether, despite incorporation, can you still sue a member of an LLP personally for negligence? There has been no case law on this and there is no doubt that an LLP can write it into their contract conditions that organisations will agree to sue the practice, not the individual.


‘This would work with a large firm dealing with a big bank - but if a solicitor is acting as a trustee for an 80-year-old and makes a mistake, that’s a very personal thing and I am nervous that they can still be held personally liable.’


He says this is ‘a very uncertain area of law’, adding: ‘This is probably why few private client-focused firms have converted.’


He says that converting to LLP status could be more onerous on smaller firms - since the process takes time and effort. This may draw lawyers away from fee-earning, which many smaller firms can ill afford. Smaller firms who think they may wish to borrow cash from the bank may also think hard before converting.


‘If you are in the situation where you have to give personal guarantees, the benefits of incorporation are much less.’


He says that Law Society rules prevent law firm LLPs giving banks fixed or floating charges, which would allow the bank to chase up the law firm debts if it got into trouble financially.


‘Big clearing banks are being asked to agree that firms can become an LLP and the banks are saying they need some security. This is holding up some conversions. It’s to do with client confidentiality - no one but a solicitor has the right to go over the client files. The Law Society is looking at this.


‘The Law Society is probably going to come up with a compromise: if the client gives consent to the charge, that will be all right. My argument is that no law firm is going to want to get such a waiver because it will make it look weak to its clients. It’s a tricky one.’


He says another drawback of converting, which can particularly hit smaller firms, is the amount of time - around four to six months - and work required to get the firm ready for conversion.


‘Five-partner firms, for example, cannot necessarily afford to have partners putting 50% of their time into an LLP conversion which would otherwise be spent on fee-earning - it will affect profits.’


Mr Baxter explains that his firm completed the conversion over a year with the main issues being the incorporation of the LLP, preparation of the members’ agreement (to replace the existing partnership agreement), transfer of the partnership business to the LLP and dealing with existing annuity arrangements. There is also the marketing and stationery side - communicating with all clients and changing all literature to coincide with conversion.


He says: ‘The main impact is the cost of external advice. We took the precaution of taking external specialist advice from counsel and also raised a few issues with Richard Linsell, which we found useful. There were also the accounting and tax advisory costs, and the marketing costs. The time cost internally should not be forgotten either, but we are in no doubt that conversion was right for us.’


He says it makes sense for law firms to coincide the switch to LLP status with their year end.


‘While not essential, it makes most sense to tie in conversion with the start of a new financial year for the business, particularly if there are new partners joining or existing partners retiring at that point. Doing it at the start of a new year may also save a little on accounting and tax advisory costs, if some of the work can be combined with year-end issues,’ he says.


Mr Richards says that a common bugbear with LLPs is that it will introduce ‘seatbelt syndrome’ within the partnership.


‘Some people feel that LLP lawyers won’t be so careful because they have no personal responsibility, but I really don’t think that will be the case. The principal reason for this is that all law firms these days are spending a lot of time on a whole range of risk management issues which have been driven by the professional indemnity insurance market. We all have to put much more into risk management otherwise we won’t get cover.’


All the lawyers agree that the switch has not made a difference to the ethos and culture of their firms and was not viewed negatively by clients - mostly because many are limited companies themselves and are therefore sympathetic.


Mr Richards says: ‘Some may have thought this is a ruse to enable firms to reduce substantially the need for professional indemnity insurance cover. This is not the case. We have the same cover as before and we are not aiming to reduce it.’


Mr Baxter says: ‘We still have the same basic structures as we had before. Some small adjustments have been made in the way we communicate and contract with third parties, to emphasise the LLP rather than partnership structure of the business.


‘While we have not noticed a change in culture, we have perhaps slightly firmed up on the formality and consistency of client engage-ment procedures to coincide with conversion - it is important that LLP status is seen as only part of a firm-wide risk management policy.’


Over the next couple of years, the old basic structure of partnership could start to be outnumbered by the LLP, and this process of conversion may become a commonplace one for firms.


Lucy Trevelyan is a freelance journalist