Why should law firms be looking at business structure now?
Monday, 20 August 2018
Quite often we trade as if we’re immortal. The assumption is that tomorrow will be the same as today, which was the same as yesterday. However, have you noticed that a number of legal firms are changing or talking about changing their structure and have you wondered why? From the conversations we’ve had with legal firms, there seem to be several reasons:
- Succession. As the Baby Boomers are now heading to their 60’s and the Millennials are less interested in partnership, the number of successors has diminished. Those that are in firms are a lot easier to be head-hunted through social media. Firms want to be at least as attractive as their peers; after all, why would you want to join an unlimited liability partnership? Indeed, does an LLP offer the same protection as a limited company? It could do, depending on the scope of the firm’s PI policy (professional indemnity insurance) , but that’s a completely different topic and one that you may not even get the chance to explain to someone who is looking to join.
- External capital. For a long time, banks had a cautious approach in lending to firms with a limited liability, but those days seem to be well behind us and now banks are prepared to offer better terms to the more corporate structures than the traditional ones.
- Internal capital. With both LLPs and unlimited partnerships training capital at a tax cost of 40% or 45%, it’s attractive for a limited company to retain capital at 19% tax cost, potentially going down to 17%. In addition, there are other tax reliefs that may be available to a limited company, which are not available to partnerships.
- Modern image and management. The relationship within a limited company, LLP or unlimited partnership can vary. Generally, disclosure and transparency are viewed positively, plus potentially divorcing ownership away from directors may give even more access to capital. Clients like us to be up to date, both technically, but also in the way we run our businesses. They want to feel good about the company that gives them advice.
There are still combinations of structures that work in particular situations, but the important thing is to consider whether your existing structure is still right for you.