Law: Where would you be without your partners?: Few firms have taken advantage of new rules allowing solicitors to incorporate their practices. Sharon Wallach explains why most prefer business as usual

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The Independent Online
WHEN the 1985 Companies Act allowed law firms for the first time to have more than 20 partners, there were those who predicted the eventual death of the partnership. The mega-firm, it was said, could not exist for long, given the management difficulties that would follow growth. But the gainsayers have only to look at the likes of Clifford Chance - with 230 partners worldwide - to see their mistake.

In the same year as the Companies Act, the Administration of Justice Act authorised the council of the Law Society to make rules enabling solicitors to incorporate their practices. The relevant section of the Act and the new practice rules came into force on 1 January, but, so far, only a couple of firms have taken advantage of the new system, and then only to incorporate part of their practices as hived-off trustee companies.

In theory, a solicitors' firm could become a limited company, but there is wide agreement that, at present, there would be a serious tax disadvantage. For one thing, the transition to corporate taxation would mean a massive acceleration in liability, and for another, there is currently only a small differential between personal income tax rates (25 or 40 per cent) and the corporation tax rate (25 or 33 per cent). Partners in firms with lower profits pay tax at just 25 per cent anyway; in

medium-sized firms, any saving is neutralised by increased national insurance contributions; and for the larger firms, the differential between the main companies rate and the individual higher rate is only 7 per cent.

According to Alasdair Neil, the managing partner of Simmons & Simmons, there are numerous other problems, too. 'Many professionals look at the corporate body, admire its efficiency but express horror at its vertical structure,' he says. 'Partnership is an odd animal, with a tremendous history. At first sight, it is not conducive to good management, but most solicitors have adapted it to suit their purposes.'

John Grieves, the senior partner of Freshfields, agrees. 'The partnership will survive,' he says. 'It is still a superb vehicle for practising professionals, particularly lawyers, because it contains the fundamental concept of give and take, exactly what is needed in a professional firm.

'There are elements of partnership that make it unique: in corporate parlance, the partners own the business and are also shareholders. But there is no hierarchical authority as if there were a chief executive.

'For example, I am elected by the partnership, so I have to convert my fellow partners by the rationale of what I am saying and, to some extent, by personality. It means that on anything major, notwithstanding that there is a lot of delegation, I must carry the partners with me. It does take time, with 100-plus partners to consult.'

Freshfields is not currently interested in incorporation, Mr Grieves says. The only reasons to consider such a move would be if there were a tax advantage or to take advantage of limited liability. The latter, however, 'is at best of fairly limited value,' Mr Grieves says.

'If there were a successful negligence action against one partner, the rest of the partnership would probably not be held liable. But you can't have a situation where one partner is made bankrupt - it would not accord with our culture.'

David Stedman, managing partner of Penningtons, believes that incorporation has its theoretical advantages. 'More people are treating lawyers as more commercial animals than in the past,' he says, 'so to that extent, lawyers deserve the same protection as the rest of the commercial world. But we can adopt structures to reflect this without going down the incorporation road.'

Robin Smith, managing partner of Dibb Lupton Broomhead, is less sanguine about the future of the partnership. 'In this competitive age, the partnership structure is inappropriate, certainly for the larger firms,' he says. 'The capital investment risk is now extremely great and unlimited liability is less and less relevant.

'Second, the partnership ethic is not appropriate for the efficient management of any large organisation in a competitive market, where decisions have to be taken quickly. The partnership ethic means having to consult every partner and if you think of a firm like ours, with 70-odd partners, you can see that it is unworkable.'

The third factor involves capital value and continuity, Mr Smith says. 'All the investment - the hard work, the planning, the adrenalin - that goes into making a successful firm can only be rewarded by income,' he says.

'The older partners have a strong incentive to withdraw the profits; the younger ones have an equally strong incentive to invest for the future. A corporate structure would resolve all that, but the route is fraught with difficulties which are causing us to pause for the time being. Until the tax position is altered, we will not consider it.'

According to John Grieves, the partnership has benefits over and above the commercial. 'It is immensely worthwhile, both for the community and for our quality of life,' he says. 'A partnership is an enjoyable place to practise law and to make one's living. The other partners are one's friends. I value that aspect very highly - it makes for more job satisfaction and strength for the firm as well.'