Legal Forms Don’t Matter – Imitating Partnerships

Over time lawmakers in various jurisdictions started to introduce bills to allow law firms to constitute themselves in legal forms other than the traditional (general) partnership. But did that bring along a lot of change? Not really, law firms keep governing themselves as partnerships – independent of their actual legal forms.

Key words: Legal Forms, Partnerships, Partners, Corporations

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Lawyers Teaming Up

Historically, lawyers worked alone as sole practitioners. Over time, many started to team up with other lawyers in some sort of partnership format – depending on the jurisdiction. And while lawmakers all over the world came up with new or refined ways of how a group of people could work together, lawyers were stuck with only one legal from available to them: some sort of the general partnership.

Eventually, lawmakers in different jurisdictions started to introduce legislation allowing lawyers to band together in legal forms other than the general partnership – however, with great differences among the jurisdictions. New South Wales was at the forefront of this action with its Legal Profession Act and the Legal Profession Regulation in the year 2001, which went as far as allowing law firms to be listed on the stock exchange (the first firm to try this, however, was Slater + Gorden in 2007). In 2011 the UK regulator allowed for the creation of Alternative Business Structures, which made it possible for law firms to obtain outside investment.

While the majority of jurisdictions handle this topic more conservatively, most lawyers have different options at their disposal when it comes to working together with other lawyers – including some liability-reducing or -limiting options such as the LLP or even corporations.

Partners all over the Place

With all these different options one would expect to see a broad variety of organizational forms, governance structures and job titles – from shareholder to CEO to member etc. But when strolling and scrolling through many, many, many law firm homepages, one basically only sees two titles: Associate and Partner. But how can someone be a ‘partner’ in a corporation?

In a study I conducted with a variety of law firm leaders from German-speaking Europe, I found out that most law firms exist in two different structures at the same time: one is the outer layer, the official legal form, which in essentially all cases ensures some limitation of liability for the owners. The other is the inner layer or real organizational structure, the internal organization, which greatly resembles the governance structures of general partnerships.

In short, and as Prof. Laura Empson puts it: law firms (and other professional service firms) are imitating partnerships.

Imitating Partnerships

In her book “Leading Professionals – Power, Politics and Prima Donnas”, Empson describes how the consulting giant McKinsey & Company (successfully and masterfully) tries to establish a partnership ethos within their ranks. She stresses that a company doesn’t even have to act like a partnership to profit from the inherent advantages of partnerships as long as it succeeds in appearing like a partnership to both professionals and clients.

Such advantages include lower agency costs (due to the proximity of owners and management), a practical impossibility of a hostile takeover (due to the distribution of the ownership rights only among a few professionals), a certain aura suggesting that professionals would act in the best interest of their clients (due to the apparent potential for liability), more efficient control mechanisms regarding juniors as well as better incentives for the same to work harder (due to the goal of becoming an owner/partner as well one day).

The fact that they are basically imitating partnerships was also attested by the participants in my study. Describing their own governance structures, all of them mentioned at one point or the other that on top of the structure is some sort of body they all referred to as “the partnership”.

Change is on the Horizon – or is it?

Many law firms, however, have started to drift away slightly from their partnership form of governance to a more corporate style governance, meaning more centralized management, more decision power to professional managers, more guidelines – even though many wouldn’t or didn’t want to admit it. During my study some law firm leaders insisted: “We are no corporation” or “despite all we are still a partnership.”

Let’s see what the future brings. Some characteristics of corporations would surely be suitable for many (esp. larger) law firms in order to benefit from efficiency gains and branding opportunities. And that it is possible to introduce a more corporate form of management and governance while at the same time keeping a partnership ethos alive, has been proven by entities much larger as even the largest of law firms, such as the consulting giants (see the above McKinsey example) or BigFour accounting firms – and it’s really independent from law firms’ legal forms.