Solicitors' practices have been allowed to incorporate since 1992 by the Solicitors Incorporated Practice Rules 1988 (the rules) but few have taken the plunge.

This is surprising in the face of the increasing willingness of clients to bring claims against their professional advisers.

The key benefit of incorporation is the protection it gives to the personal assets of those partners not involved in the actionable advice.

Incorporation also allows assistant solicitors to secure an equity stake in the business and to grant a floating charge to lenders.However, the rules leave solicitors in a 'half-way house'.

Unlike businesses and other professional firms, such as those of accountants and surveyors, solicitors are not permitted to issue shares or offer directorships to non-solicitors.

This places an unnatural restriction on growth by excluding a law firm from obtaining outside investment.

It curtails the ability to compete with accountants and other external competitors.

The two most important concerns regarding incorporation are taxation and public financial disclosure.

In regard to taxation, incorporation naturally involves cessation of self-employment by partners.

Although corporation tax for companies P 25% for smaller companies and 33% for larger companies P is lower than the highest rate of 40% for the self-employed, any saving is mostly neutralised by the increased cost of national insurance contributions.

The change to self-assessment has eroded the previous benefit of self-deferral for the self-employed.

There are also costs of converting from a partnership to a company.

A detailed analysis of these issues appeared in Raymond Taylor's article 'To incorporate or not to incorporate P fiscal considerations' (see [1992] Gazette, 12 February, 32).

Some large law firms already remunerate their personnel through service companies, taking advantage of the more favourable tax regime for pension contributions.

These are usually unlimited liability companies that do not require public financial disclosure.In regard to financial disclosure, the rules require that an incorporated pra ctice must be registered in England and Wales, which means that financial accounts must be submitted to Companies House annually.

A number of accountancy firms publicly disclosed their financial results in 1995.

In the future, larger law firms may come under pressure to reveal their figures.

Some may see disclosure as a means of strengthening relationships with their clients, regardless of whether or not they actually incorporate.

The establishment of a service company to manage an incorporated law firm is currently being explored by some practices.The media coverage of the incorporation debate in the accountancy profession highlighted the issue of whether incorporation weakened the partnership culture.

This may reflect a concern to preserve a firm's existing style of operation.

However, an incorporated firm has the same freedom to structure its management procedures as a partnership.

Firms must balance the demands of solicitors for ownership and involvement with the need for strong financial performance, new capital and professional management in an increasingly competitive environment.Many firms have senior practitioners who have not taken partnership for one reason or another.

These firms lose the opportunity of presenting these solicitors to their clients with the appropriate degree of seniority, according them the necessary status, and rewarding them in a flexible manner.

A corporate structure can remove these difficulties, separating seniority and status from financial investment.An incorporated practice can be formed by applying to the Law Society, paying a £150 application fee and a £150 compensation fund contribution.

The memorandum and articles of association must contain certain provisions, and a specimen form is available from the Law Society as part of its incorporated practices information pack.

In addition to the SIF cover of £1 million, additional top-up cover is required, which is a minimum of either £500,000 on each claim or £2 million per annum in aggregate.

Debentures can be issued, and this may facilitate more flexible forms of funding than traditional finance.

There are an increasing number of lawyers who regard the partnership structure as inappropriate in larger organisations, with a growing need for professional management and flexible career paths more akin to the corporate model.

These benefits and the protection afforded by limited liability are real and we are likely to see more firms incorporating in the future.CASE STUDYCity firm Davis & Co is planning to incorporate within the next six months having already set up a company for this purpose.

The firm has operated since 1993 and now has around 20 solicitors.

It already functions on the corporate model.

The firm has separated the seniority of solicitors from the ownership of the firm in the same way as a plc.

The term 'Senior associate' is used instead of 'Partner'.

Remuneration is performance-based, related to each solicitor's billings and marketing results.

The firm is managed by an executive committee comprising solicitors and non-solicitors.

Following incorporation the committee will report to a board of directors which will include a chairman and a chief executive who will be solicitors.Now and in the future, all solicitors will have the opportunity to participate in the management of the firm including leading or being involved in marketing and other initiatives, enabling them to develop an area of practice and share in its financial rewards.

Shares in the company will be allotted similarly to partnership, although investment from external solicitors will also be considered.