Many traditional partnership models simply do not work

Many traditional solicitors' practices need to consider their business structures if they are to survive in the new world of legal services.

Many traditional partnership models simply do not work, with the partners taking all the profits as their monthly drawings and not retaining profit in the business. There are several reasons why solicitors should consider changing their business structure from the traditional partnership or even a limited liability partnership.

Firstly, we must acknowledge that succession planning and exit strategies are sadly lacking in most firms. Why should a younger future owner of a law firm invest in the traditional partnership model? This was the method of creating an exit strategy for the senior partners when a younger fee earner or associate would be promoted into the position of salaried partner then invited, usually subject to performance, to borrow money from the bank to invest in the practice and provide the necessary capital for the senior partner to retire. Partner capital loans have been extremely popular in the past few months. But is this the solution for all firms?

The aspiration to become a partner in a mid-sized or even smaller practice is no longer part of younger solicitors' goals, and who can blame them. They are still keen to work hard but do not require the responsibility of partnership. However, if you could demonstrate an opportunity to become a future owner of a regional practice with limited liability, then there is growing number of interested parties.

Outdated models

Two very different clients shared this challenge with me this week and provide key examples.

The first is a two equity, five partner practice which is profitable and has an excellent private client base. But, the two equity partners are both 68 years old and the salaried partners do not wish to invest in the partnership.

The second is a top-200 limited liability partnership where the members have not appreciated the difference between ownership (or being shareholders) in a business and the skills required to manage. Managing by committee is actively stopping decisions being made and the business progressing.

These are just two examples of why law firm structures need to change; in both instances a move towards a corporate structure with the necessary governance structures in place could transform these practices.

How many other firms are struggling with the same outdated business model that is no longer fit for purpose?

Future structures

There are significant tax savings in becoming incorporated as well as creating the vehicle for future investment both from within the firm and potential external investment.

If you wish to develop and maintain your independence and your practice, then buying your own business has its attractions.

First, if you take the correct advice about incorporation, you can purchase your own goodwill; this may be the only way of achieving any value in your goodwill by buying it yourself. You can then convert your capital accounts into loan capital in the new limited company and draw down that capital over the next five years or so, subject to profitability.

Points to consider:

• One structure doesn't fit all

• Difference between shareholder/owner and director/manager

• Number of future owners - internal or external investment

• Profit-sharing ratios

• Frequency of entrants and exits of the shareholders

• Exit provisions and partnership deeds

• Taxes and commerciality

Awareness of the commercial and tax benefits of the restructuring opportunities available to solicitors has increased significantly over the past couple of years. A growing number of firms have either incorporated or considered incorporation.

Any such restructuring should be undertaken with careful consideration of the commercial objectives and circumstances of the business, with any tax advantage viewed as a secondary consideration. That said, the often significant and long-term tax savings which can be achieved should not be overlooked, not least in terms of the potentially significant positive effect on cashflow.

There is no doubt that the legal sector will consolidate. Reviewing your governance structures and taking the necessary advice will be invaluable to your future.

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