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Partners will be partners: the reluctance towards incorporation

Partners will be partners: the reluctance towards incorporation

Social status and traditional legal values are at the centre of the ongoing debate about whether or not law firms should incorporate. Claire Chaffey reportsA reluctance to give up the status…

Social status and traditional legal values are at the centre of the ongoing debate about whether or not law firms should incorporate. Claire Chaffey reports

A reluctance to give up the status that partnership brings and the erosion of traditional law firm values are at the heart of the debate on the merits of law firm incorporation.

The topic of "Incorporation: What's in it for your practice?" was tackled during a panel discussion at a LexisNexis* practice management conference held in Sydney on May 24. During the discussion, several high-profile speakers from both incorporated and non-incorporated firms shared their views on the advantages and disadvantages of law firms becoming corporations.

A prominent issue that arose was the notion that incorporation would not suit many established law firms because partners in law firms enjoy being just that, and the idea of becoming "mere employees" in a corporation does not appeal to them. "There would be an impact on partners in terms of their perceived status," said Clayton Utz chief operating officer and partner Stuart Clark.

"They will have gone from being partners in a law firm, which has a particular level or standing, to being - dare I say it - merely employees in a corporation. For some people, that would be a significant factor and one that I don't think should be underestimated."

Gilbert + Tobin managing partner Danny Gilbert agreed, saying that while the firm had considered incorporation, the benefits were simply not persuasive enough. "Partners like being partners in a law firm. They like to think that they've got a say," said Gilbert.

"They don't really want to be treated like employees. I don't think partners are going to easily have that wrested away from them."

Margaret Pavey, the national practice manager of incorporated law firm Mason Black Lawyers, said partner perception is already a very real issue for the firm and one they are preparing to deal with more and more as the firm grows and expands. "Senior lawyers generally aspire to partnership status, and they may feel that an incorporated legal practice does not provide them with the recognition they need in the profession, nor the control they may wish to have over their business, said Pavey.

"I think this will be an issue that my practice will confront going forward as our practice matures and grows... I have lawyers in my own firm right now lamenting this very fact."

Incorporation and pro bono

Another concern raised by panelists was the notion that incorporation could potentially erode traditional legal obligations and practices, particularly in relation to ethics and pro bono. "Incorporation may encourage lawyers to take a different approach to their ethical and fiduciary duties and obligations over time," said Clark.

"There is a probably a risk, in the long term, as to how lawyers see their pro bono obligations. Pro bono is an important part of practice ... and I have some concerns that incorporation may, in time, see that whittled away."

Gilbert argued, however, that incorporation would have no effect on ethics and pro bono obligations and that it is essentially the "personality" of the firm that will determine how it behaves in this regard.

"There has been a lot of noise about ethical obligations ... and the ethicists were concerned that we would see a departure from the best traditions of the profession. I am not worried about that," said Gilbert.

"If you're not interested in pro bono, you won't do it; if you are, you will. It doesn't make a difference if you're incorporated or not."

Despite the discussion of numerous other potential disadvantages associated with incorporation, such as capital gains tax issues and an increase in reporting requirements under the Corporations Act, the principal of Crowe Horwath Business Advisory - Legal Enterprises, Andrew Chen, said that for the majority of start-up firms in NSW, incorporation is now the preferred model.

"It depends on the size of the firm and the model that your firm is trying to pursue," said Chen. "Most incorporated practices in NSW are at the smaller end of town, and in my experience ... they are predominantly going down the incorporated route. But if you're an existing firm and you want to go from a traditional partnership model into an incorporated practice ... those hurdles are too great."

* Lawyers Weekly is published by LexisNexis.

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Partners will be partners: the reluctance towards incorporation
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