LLP personality: How your firm's culture affects its future structure

“A nation that loses sight of its own history is a nation in trouble. Without a knowledge of where we came from, and how we got here, we are unlikely to understand where we are going, and we are likely to flounder about in a cultural fog” – Colonel David Parker, The Parachute Regiment

Mention the word ‘culture’ and some people will repeat tired old jokes about mould in unwashed coffee cups.
That does a dis-service to a key component of any business, and one particularly crucial to planning for the effective structuring of law firms.

A firm’s culture is, for want of a
better word, its personality. The firm’s leaders – the partners – are the creators of its culture for a very straightforward reason: the culture of any given firm is nothing more than the aggregate of the way its partners choose to do business, the way they behave. It’s ‘the air that we breathe’, ‘the water that we swim in’ and ‘how it feels to work here’.

Virtually all firms will have a page on their website summarising their culture
and values. The crucial question is
whether these are just words or whether they accurately describe how the firm and its people really behave. It is one thing, for example, for a firm to say that its people are team players, but quite another thing to ascertain whether they actually behave as a team.

Given that the only stock on the shelves of a professional services firm is its people, how they behave and do business is just as important as their technical competence and professional skills(and arguably even more important
in a world in which technical competence is increasingly taken as given).

That is why culture really matters in considering how to structure a firm. For example, do decisions about the business tend to be made collectively, reflecting
a collegiate partnership approach, or has a more corporate management structure been adopted? Is information about the business (including financial performance, reward and equity ownership) disclosed, or is it beneficial to restrict access to this information as much as possible (both internally and externally)?

The right fit

Finding a structure that fits culturally is therefore crucial. No two firms will have identical cultures, because no two firms have the same people in their partnerships. It is also vital to acknowledge that this is not a question of ‘right’ or ‘wrong’ cultures, nor is it about likes and dislikes. The task is to structure the firm in a way that is compatible with its culture.

Two anecdotes from conversations with two partners in two different law firms, each very successful and well respected, illustrate this point. The senior partner of one firm said his partners made decisions by sitting together around a table on
a weekly basis. He was well aware that the firm’s decision-making process was probably unique – and certainly not common – among sizeable law firms in the 21st century, and accepted that it might well not work for most firms. But, it worked for his firm and was, for his partners, an important componentof a cohesive team culture.

A partner in another firm explained that they had a ‘one man, one vote’ partnership when it came to making decisions – and that ‘the one man with the one vote’ was their managing partner. The observation was made with evident affection and respect for their managing partner.

Neither culture is right or wrong, nor is it better or worse. They are, however, very different. In terms of how these cultures are translated into effective corporate structures, firms that have a consensual culture often work very well as general partnerships or LLPs. The flexibility afforded by a partnership or LLP membership agreement means that it is possible to designate different voting levels for different decisions, to restrict voting on some issues to certain classes of members and/or to introduce weighted voting rights in certain circumstances. Partnership/membership agreements tend to be highly bespoke and reflect the decision-making culture of the firm.

As highlighted in the second article in this series, an increasing number of law firms, particularly at the commoditised end of the spectrum of legal work, are opting for a limited company structure. These firms often have top-down corporate management cultures, where day-to-day management is controlled by a chief executive and board of directors. They also often have external investors (for example the Australian-listed law firm Slater & Gordon), who take comfort in being able to rely on the well-established statutory framework that applies to limited companies. Therefore, the corporate culture of these types of firms is ideally suited to the limited company structure.

Opacity vs transparency

“As a general rule, the most successful man in life is the man who has the best information” – Benjamin Disraeli

Whether a firm is culturally transparent or opaque – or somewhere in between – is another crucial aspect to consider when deciding on its structure.

Firms that are culturally transparent often allow all partners access to the organisation’s financial records.
Certain (even relatively large) firms go as far as disclosing individual partner financial performance/rewards, with each partner able to see how well/badly their fellow partners have performed and how much profit they have been allocated.

On the flip side, firms that are opaque restrict the information disseminated to partners, with perhaps only a select few (such as the management committee and/or the managing partner) having access
to the complete picture.

Most firms tend to be somewhere in the middle, with senior/equity partners given access to the most amount of information and junior partners restricted to basic information, such as the annual accounts.

Partnership and LLP members’ agreements can be tailored to reflect the information rights of various categories of partners. Shareholders of limited companies have entrenched statutory rights to certain information relating to the company.

Disclosure of potentially sensitive financial/ownership information to the general public is also another factor to consider. Of the three main legal vehicles used by professional service firms, the limited company is the most transparent; its constitution (articles of association) is a publicly-available document. It is also required to file an annual return setting out the names of its directors and shareholders and to disclose the number/class of shares held by each shareholder.

Partnership and LLP members’ agreements, on the other hand, are private contracts and can be kept confidential. The ownership shares/profit allocation of individual partners/members can also remain confidential.

LLPs and limited companies are required by law to publish annual accounts with the Registrar of Companies. Whilst LLPs are not required to publish the individual profit shares of their members, they are required to publish the profit share of their highest-paid member (although they are not required identify that member by name).

General partnerships are the most opaque of the legal vehicles used by professional services firms, as they are not required to publish accounts or any other ownership/management information.

Ensuring compatibility

If a firm understands what its culture really is (and why it is as it is), and takes care to ensure that its structure is culturally compatible, there is a significantly better prospect of the firm being successful.

Many firms are currently undertaking reviews of their legal structures given HMRC’s changes to the taxation of LLPs in the Finance Bill 2014. However, firms should take care that they do not lose sight of their culture when deciding on their legal structure, be it LLP, limited company or any other form of business vehicle.

Where decision making in a firm has been historically consensual and partners have taken comfort in keeping their partnership affairs confidential, it would be a cultural shock to the partners if they were to move to a limited company structure (whether for tax or other reasons).

Changes to the taxation of LLPs could ultimately result in the reappearance of a genuine partnership culture as firms have a greater incentive to review their reward mechanisms and management and governance structures, with a view to persuading HMRC that their partners have ‘significant influence’ over the business and do not received ‘disguised salaries’. It remains to be seen, however, whether this is a realistic prospect for
the largest firms.

Mark Jones leads the professional practices consultancy and Zulon Begum is an associate in the professional practices group at Addleshaw Goddard (www.addleshawgoddard.com)