Incorporating can get personal
The mechanics of incorporating a legal practice are “very simple” but when unequal drawings in partnerships are brought to book, things can get personal.
That is the experience of Brian Ward, the director of Brian Ward & Partners Pty Ltd which incorporated in 2002.
Patrick Oliver, the convenor of the Incorporated Legal Practice (ILP) forum put Ward under the grill at a Q&A forum at the Law Institute of Victoria on Wednesday 14 March.
Exploring early issues in incorporating, for an audience of lawyers who have either already incorporated their legal practice or are wondering if it is worth it, Ward said he was “surprised” at how the “accoutrements of the partnership” start to disappear immediately.
“Once you pick a date, and the invoices and your name and your notices to your clients go out, within six months almost all traits of the partnership have disappeared, it’s extraordinary,” said Ward.
The difficulty arises, he said, when calling to account unequal drawings in the partnership
“It can be a very difficult, personal matter because if for example you’ve got a very high-fee producing partner who has a big loan account then you can get into personality type issues easily,” he said.
Due to accounting standards, incorporated law firm must bring to book work-in-progress. If a partnership has a huge amount of unbilled work in progress, Ward said this can raise difficult management issues because of the different tax treatment for partnerships to incorporations.
“The real question is whether the debtors list is the true debtors list. It has no tax effect in the partnership but once you become a corporation there’s a different treatment of it so it makes all the partners go through and fess up and say ‘look that’s not recoverable’, so some practices can get quite a shock because they realise [their books] are not as valuable as they thought they were,” he said.
To these complications, Ward’s advice is to be “incorporation ready” before making the transition.
“I think you need a period of time beforehand to address big business issues like personal overdraw because once you’re an incorporated entity, loans are regulated transactions so you simply cant be casual about those things,” he said.
BWP did not lose any partners when it transitioned to incorporation and Ward asserts various commercial benefits of the change, as well as better mechanisms for dealing policy; succession; high-level practice acquisition; discipline; market positioning; and regulatory intervention issues.
“There are times in your business cycle where you need to think like a director. It becomes a bit of crises management unless you’ve got a structure,” he said.