Law firms have been slow to embrace limited liability partnership.

Roger Zair investigates why

Two and a half years ago, we were braced for the stampede.

Everything we as professionals had grown up with, and generations of professionals before us had taken for granted, was about to change.

At last, the limited liability partnership (LLP) was on the horizon.

There was an expectation that the LLP format would sweep the board, that professionals would be eager for change and give managing partners a clear mandate for action.

Of course there has been change.

Some very high-profile law firms have converted to LLP status - Clifford Chance, Eversheds and Wragge & Co, for instance - and several of the large accountancy firms have converted or announced their intention to go to LLP.

But it has hardly been a rush.

Approximately 5,000 LLPs have been registered at Companies House so far, which suggests that as the new kid on the block LLP has been well received.

Most of these, though, are trading businesses - with strong representation from property developers and some industry-specific bodies such as agricultural co-operatives - not professional practices.

In fact, more than 90% of the top 100 law firms are still traditional partnerships, so at least in the legal profession that structure is still by far the most common model.

So why no rush to LLPs? The original case for the LLP model centred on risk, as professional firms came to appreciate the threat posed by a litigious world.

That case is still there.

However, doing the analysis takes time because it can spark other thought processes.

Partners may start to reappraise their objectives and think creatively about their business model.

For example, the law firm Battens in the west country decided that it would incorporate part of the practice, but as a limited company - Lawyers At Work Limited - not as an LLP.

Chief executive Andy Marshall explains that this was done for entrepreneurial motives, not just for risk management.

'We see the personal injury market as one where we can build long-term value for the shareholders, who are the partners,' he says, 'and a limited company structure suits our business plan much better than a partnership or LLP.'

A limited company structure can be very attractive for a practice aiming to generate proprietorial return by a 'trade sale' exit, rather than drawing out profits on a year-by-year basis.

Building a practice and then extracting value in this way can be very tax-efficient, with effective capital gains tax at only 10%, assuming full business asset taper relief.

So partners who started by pondering the pros and cons of LLP status have been led to extend their evaluation to the pros and cons of a limited company - a valuable thought process, but one that leads to decision-making taking longer than expected.

Partners also need to get comfortable with financial transparency, if they are contemplating incorporation or LLP status.

The new entity will have to file its accounts at Companies House, including the appropriate disclosure for the earnings of members (LLP) or directors (limited company).

Anyone with an interest in the practice, such as clients, staff, suppliers and landlords, will be able to obtain the annual accounts.

Initially, this was a sensitive issue.

Unaccustomed to revealing financial information, and nervous that their profits would look too high (or too low), some partners considered that to put the accounts on public record was a step too far.

This concern seems to be eroding with time, as more practices publish their accounts and there is ever-increasing financial disclosure in the legal trade press in any case.

Details of turnover, profit, profit per partner (top of range, average, bottom of range) and fee-earners are provided to journalists by firms.

Those journalists then publish annual performance tables.

Sizeable firms understand that the market requires them to be financially transparent and accept the consequences.

What can take longer to resolve for some firms is the accounting policies they will use in their published financial results.

Historically, there were no rules for partnership accounting, although the Inland Revenue has in recent years required the partnership tax return to incorporate 'true and fair' figures.

However, once a practice has converted to LLP status, its accounts have to comply with the statement of recommended practice and UK accounting standards.

This can throw up some major issues that take time to resolve.

For example, the practice may have paid for goodwill many years ago, and still carry it on the balance sheet.

Converting to an LLP means this goodwill will have to be amortised, and partners will have to bear the cost of the write-off.

Other areas that can cause difficulty are the valuation of work-in-progress and off-balance sheet liabilities such as annuities, property leases, and defined benefit pension schemes.

Partnerships must take the time to dry-run the partnership accounts using the accounting policies they will have to apply as an LLP.

This should highlight any issues for partners to consider, in advance of making the LLP decision.

These steps are all essential, and they all take time - so conversion to LLP should not be rushed.

Partners also worry about whether they will lose something special, the spirit of partnership.

William Arthur, director for professional practices at Barclays Bank, is a big enthusiast for partnerships.

He says: 'When they are good, they are very, very good - the trust, empathy, and shared vision is very powerful.'

So when considering changing to LLP, partners must ask how they will retain what Mr Arthur describes as 'that strange sort of glue, that factor X' that exists in partnership and that is absolutely essential to success.

Given all this, will LLP status become the vehicle of choice, notwithstanding the slow take-up so far? My view is that most professional practices will incorporate - either to an LLP or to limited company status - within the next few years.

A corporate vehicle will become the norm for firms of substance.

What will drive this is not the present partners' perception of risk, but the risk perception of those aspiring to be partners.

Many law firms have expressed the view that they are not concerned about risk - their claims record is good, they do not do risky work, their risk management procedures are tight, and they have plenty of insurance cover.

In the end, none of this will matter if the recruitment market sees things differently.

One day they will interview an excellent candidate whom they are keen to have as a partner.

That candidate will decline the partnership's offer and instead accept the offer of 'membership' made by a rival firm - because the candidate's perception is that the LLP is less risky than partnership.

Then there will be a rush.

Roger Zair is head of professional practices at accountancy firm Grant Thornton