11 November 2011
The big partnership debate: leave it in the past or embrace it for the future?
Mayson: partnerships are not collegiate organisations
Is partnership an “inefficient and unattractive” structure that should be ditched to survive in the new legal marketplace, or is it a viable current model with much to offer lawyers wanting flexible governance and discretion?
These conflicting arguments were given respectively by the College of Law’s Professor Stephen Mayson and Aster Crawshaw, a partner in Addleshaw Goddard’s professional practices group, speaking at a LexisNexis forum on legal services regulation in London.
Professor Mayson said that while it has hitherto produced good income returns, the partnership model is “not building sustainable, attractive businesses… We will have to get rid of the partnership structure, I’m afraid, to survive in the new marketplace. It is not an efficient model”.
He dismissed as “rubbish” the notion that partnerships are collegiate organisations that understand investment over time. In fact, the behaviour of lawyers in partnerships, where they “do whatever they want… treat staff badly” and so forth, “is the very negation of collegiality. What they’re doing is using collegiality as a front, as a veneer, as a barrier for any form of change”, he argued.
Partnerships can encourage short-termism, especially when a partner who is soon to retire is asked to approve a significant investment in, for example, a foreign office or a major IT project, said Professor Mayson. Alternative business structures (ABS), by contrast, will bring tradeability in ownership shares: “They’ll be much more able to trade the ownership interest and therefore they will be able to take much longer-term investment decisions,” he said.
Other flaws he identified were the lack of distinction between capital and income within traditional law firms and confusion over how the returns the business produces are distributed. “It’s almost entirely owned by the equity partners and it’s distributed as one sum of net profit share. It doesn’t distinguish who’s being paid as an owner, investor, manager, or worker. That I think is one thing that the new entrants will strip out. They will understand who’s earned which bit of the money that is being produced.”
Professor Mayson also pointed out that the existing structure of regulating legal services presents potential ABS licence-holders with a “considerable regulatory burden”. He predicted businesses would seek ways to deliver the non-reserved activities which typically make up some 80% of law firms’ workload, while avoiding regulation altogether.
Mr Crawshaw, however, speaking in a session titled Structuring law firms for the real world of tomorrow, concluded that there is “no magic answer” to which is the most suitable structure for law firms to adopt, because it depends on the weight attached to such things as tax efficacy, limited liability, governance flexibility, funding and capital, and investability.
He admitted that from a perspective of investability, partnerships are “pretty much a no-no” – they do not enjoy the limited liability of LLPs, while opportunities for funding are limited. But the model does have several advantages, he suggested.
“The attraction of general partnership is actually quite broad,” he said, pointing to governance flexibility and member remuneration, because it has “fewer constraints on management than any of the other vehicles”.
A key feature of partnership is the discretion it offers in terms of disclosure, he added: “You have to disclose who the partners are but you don’t have to disclose the nature of their interests; you don’t have to file accounts, and you don’t have to file your constitutional documents. So if secrecy and discretion are key considerations for you, the general partnership is an attractive vehicle.”
Partnership is also appealing from a tax perspective, said Mr Crawshaw. For instance, it is “transparent”, no employer’s national insurance is payable, and entrepreneurs’ relief allows an effective 10% tax rate on disposals.
By Legal Futures
Tags: ABS, Alternative business structures, limited liability partnership, LLP, partnerships
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