Law firms moving away from traditional partnership model
Law firms are moving away from the traditional partnership structure with 47 per cent now incorporated businesses, according to new research.
Forty seven per cent (4,890) of the 10,400 law firms in the UK are now incorporated businesses, up from 32 per cent five years ago, according to analysis from accountancy firm Hazlewoods.
The increase has been driven by sole practitioners and traditional partnerships – as opposed to limited liability partnerships (LLP) – changing their structures.
Over the past five years the number of sole practitioners has fallen 22 per cent and the number of traditional partnerships 35 per cent.
Incorporating a firm gives two major advantages over sole practitioner status or partnership.
In an incorporated business, partners’ personal exposure can be limited if a firm goes bust.
And with corporation tax rates low and set to reduce further, incorporation can be tax efficient in certain circumstances.
Andy Harris, partner at Hazlewoods, said: “Over the past five years there has been a huge shift in how law firms are structured. Some would say the ‘traditional’ partnership structure is fast becoming out of date.”
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Sole practitioners and traditional partnerships leave partners facing unlimited personal liability.
If a firm fails, partners can lose everything including their personal assets and family homes.
In an incorporated company, the owners’ exposure is typically limited to the value of their investment and personal assets are protected.
This also applies to members of an LLP.
Incorporated companies can be more tax efficient than partnerships, as after taking account of corporation tax on company profits, shareholders can take money out of the business as dividends, which are subject to low rates of income tax.
Harris said: “On top of limiting risk and potentially lowering the firm’s tax burden, there is also the thought that incorporating can free up time for fee earners by creating management boards.
“However, incorporating a firm is not always the perfect solution, despite the clear upsides it can offer. Any structural change should not be motivated by tax alone, as there are plenty of administrative costs, such as company valuations, and other factors to consider.”