The incorporation debate has now heated up in the accountancy profession.

KPMG has just announced its plans for incorporation, whereby its high exposure work will sit in a limited company owned by the partnership.

Price Waterhouse is also actively considering limited company status.

There will now inevitably be a bandwagon upon which many other accountancy firms will jump.

It is a development which must surely also be reflected in the legal profession.There are a combination of factors which have pushed incorporation into the minds of many professionals.

The principal concern is, as ever, unlimited liability.

This has been brought into sharper focus by a combination of increased litigation and lower professional reward.

Prospective junior equity partners will be asking themselves whether their expected earnings over the next few years will compensate them for the prospect of having to put their own assets on the line in the event of a substantial claim.

Even without the prospect of a law suit, it is a sobering thought to be personally liable to pay the landlord and the bank when the foreseeable future holds only uncertainty.

These days, equity partners might look enviously at director/employee clients whose personal assets are not similarly exposed.

It may not just be the litigious client or the general business environment which can erode a partner's personal wealth.

It can also be affected by poor management.

The decisions taken by those partners with management responsibility commit every partner for better or worse.

The managing partner with vision and business skill may feel constrained by the possible impact that failure might have on fellow partners.Incorporation can assist with these issues up to a point.

The separation of personal wealth from the company's fortunes removes a psychologically significant part of the downside of business decisions.

The inter-related commercial issues of asset ownership, long-term investment and borrowing are consequently easier to dea l with within a limited company.It is difficult to get to grips with the implications of the partnership's ownership of shares or of an interest in another partnership or a property.There are complications such as whether the shares/interest/property are partnership assets and, if so, whether they are owned in profit-sharing ratios? When those profit share ratios change, how is any appreciation in value dealt with? What happens when a partner joins or retires?Where firms do make such an investment, a common approach is to ignore either the asset or any increase in its value in the firm's balance sheet.

This is convenient and there are good tax reasons for this approach.

However, it understates the strength of the balance sheet where assets have appreciated.The approach also militates against firms taking longer term investment decisions.

From any individual partner's viewpoint, an investment which reduces jam today must increase his or her jam tomorrow.

The problem is that there is no guarantee when, how or even if, current partners will get that jam.

That hardly justifies sacrificing current disposable income and extra risk in the form of partnership borrowing.The question arises as to how the use of a company avoids this problem, given that the commercial relationship between the partners and the firm will not substantially change.

Successful quoted companies achieve a balance between director reward, shareholder return and investment.

Although this would still be possible in a partnership, it requires very strong management, considerable discipline and a carefully drafted partnership agreement.

After all, every pound of profit in a year belongs to that year's partners according to their profit sharing entitlement.

Who should tell those individuals that they must leave earnings in the firm for the benefit of future generations of partners? These are earnings on which the individuals suffer a full 40% income tax charge (and possibly more under a change of government) whether or not they are enjoyed by those partners.The incorporated partnership would have a reward structure based on, but not necessarily equivalent to, profit.

Retained profits suffer a lower tax rate (between 25% and 33%) and belong to the company.

From this is generated a pool of funds for investment enhanced by a suitable gearing policy.

Borrowing for investment or, indeed, the assumption of any burden, is not quite so daunting when individuals are protected by the veil of incorporation.Incorporation helps to ameliorate the problems that arise on the issue of investment.

It does not solve them.

There remains the question of whether partners as shareholders should have a pre-determined basis for selling shares at a value when they retire.

Unless the company is quoted, creating an internal market in shares will give rise to difficult valuation issues and tax problems.The incorporating partnership with more than, say, five profit sharers may in due course cease to have partner shareholders.

The founder shareholders on retirement might transfer shares to a discretionary trust for the general benefit of future directors/employees at a pre-agreed formula.

Future 'partners' can be rewarded with options from the trust to provide an incentive to contribute to growth without reflecting significant underlying equity interest.As to borrowings, there is a belief that companies have easier access to capital than partnerships.

Even with conventional bank finance, financing opportunities increase with a strengthening balance sheet.

Also incorporation opens up poss ibilities of outside equity participation, the issue of securities and flotation.The strength of the arguments in favour of incorporation has increased in the light of the change in economic circumstances in the last few years.

Now that the prohibition on incorporation has been removed what of the arguments against?A number of surveyors' and architects' practices which incorporated before the recession have failed and many others are in a distressed state.

Whilst the depressed property market has brought this about, corporate status has in some cases exacerbated the problem.Incorporation may ease the process of long-term investment but, insofar as this has encouraged some firms to borrow for investment or property acquisition in the late 1980s, it has contributed to those firms' subsequent problems.A further problem has arisen from the legal separation of 'partner' and practice that results from incorporation.

A director with an established remuneration package somehow expects that to be sustained or improved.

After all, one does not normally reduce employee remuneration.

Therefore, those companies which entered the recession with high remuneration packages found it difficult to reduce these in line with changed economic circumstances.

This inflexibility hastened the progress into insolvency.There have been distressed partnerships too which have been victims of similar policies.

But the very structure which complicates investment decisions protected many a partnership from a disastrous purchase.

Furthermore, partners' earnings are linked only to the profit of the practice -- good or bad.

As long as the drawings policy was sensible, liquidity was maintained.

Even if it was not, the remedy was to ask partners to put cash back.Therefore, the restraint inherent in the partnership structure is not all negative.

However, the ambitious partnership looking to the future may find it has to break the partnership mould if it wants to capitalise on expansion opportunities.There are other objections to incorporation.

These include the loss of partnership culture, less flexibility and public disclosure.

There have also been the tax disadvantages.The partnership culture argument is certainly based on a very strong emotion prevalent among longer-standing professionals.

Many strong and successful practices have been built up by highly committed individuals, adept at building up good teams of people with complementary skills.

Partnership gives these individuals an opportunity to develop the practice with a strong team spirit, the pride of being co-owners and an option to reap good rewards from the success that they generate.This ideal can still be relevant for smaller firms.

The problem for larger partnerships is that individual partners may know very little about other partners or prospective partners in the practice.

This is no small concern where partners' personal circumstances are so inextricably linked to the performance and abilities of other partners.When two firms merge, the very issue of partnership culture can prove a stumbling block.

There are likely to be different approaches and attitudes on important matters.

Incorporation at that point can provide an opportunity for a new common approach.Flexibility itself has a number of facets.

There is little statutory or case law regulating the affairs of a partnership.

The rights and duties of the partners and the way a firm is run are normally set out in the partnership agreement -- if there is one.

This normally provides considerable scope for changing partners' profit sha res, drawings and roles, in response to changing needs of the business.Partnerships are not subject to the stringent statutory framework of companies.

Partnerships do not, for instance, need to comply with the seven or ten-month company deadline for filing accounts or to have an annual audit.

There are no annual returns required nor a statutory framework for meetings.

Furthermore, the tax reporting regime for perks and benefits is quite strict for directors compared with partners.

Overdrawn directors' current accounts require proper disclosure and give rise to tax liabilities which do not arise with a partnership.To some extent, changes in tax rules will impose a greater discipline in the production of accounts.

Furthermore, some will argue that the framework that exists for companies has evolved for good reason and a partnership structure should not give management an excuse to offer lower standards of reporting to fellow 'shareholders'.The prospect of public information available in company accounts has always scared professional practice partners.

Will it give too much away to the opposition? How will staff and clients react to the firm's profits?These are real concerns and there is many a company director who would love to have the benefit of non-disclosure that a partner has.

However, it is one of the disadvantages of a corporate structure.

On the plus side, there will be more information generally available which means greater intelligence for practice managers.The final area is that of tax.

Additional tax liabilities both upon incorporation and ongoing have served as a significant disincentive.

This has not disappeared but changes to the tax system have made them much more bearable.

From that point of view, the decline in profits generally has minimised the immediate disadvantages.

A further factor has been that the Inland Revenue and the Institute of Chartered Accountants in England and Wales have managed to agree upon certain issues arising on incorporation which have removed several concerns about the tax position.Incorporation will be on the agenda of many firms and the decision will be a difficult one.

For many, the arguments in favour will not be overwhelming but, on balance, gently positive.

It is inevitable, therefore, that a number of practices will opt to become limited companies in the next few years.