Print Posted by Dufford, Waldeck, Milburn & Krohn, L.L.P. on 05/04/2016

Law firm

Law firm

Law firms are organized in a variety of ways, depending on the jurisdiction in which the firm practices. Common arrangements include:

  • Sole proprietorship, in which the attorney is the law firm and is responsible for all profit, loss and liability;
  • General partnership, in which all the attorneys who are members of the firm share ownership, profits and liabilities;
  • Professional corporations, which issue stock to the attorneys in a fashion similar to that of a business corporation;
  • Limited liability company, in which the attorney-owners are called "members" but are not directly liable to third party creditors of the law firm (prohibited as against public policy in many jurisdictions but allowed in others in the form of a "Professional Limited Liability Company" or "PLLC");
  • Professional association, which operates similarly to a professional corporation or a limited liability company;
  • Limited liability partnership (LLP), in which the attorney-owners are partners with one another, but no partner is liable to any creditor of the law firm nor is any partner liable for any negligence on the part of any other partner. The LLP is taxed as a partnership while enjoying the liability protection of a corporation.

Restrictions on ownership interests

In many countries, including the United States, there is a rule that only lawyers may have an ownership interest in, or be managers of, a law firm. Thus, law firms cannot quickly raise capital through initial public offerings on the stock market, like most corporations. They must either raise capital through additional capital contributions from existing or additional equity partners, or must take on debt, usually in the form of a line of credit secured by their accounts receivable.

In the United States this complete bar to nonlawyer ownership has been codified by the American Bar Association as paragraph (d) of Rule 5.4 of the Model Rules of Professional Conduct and has been adopted in one form or another in all U.S. jurisdictions,[1][2] except the District of Columbia.[3] However, D.C.'s rule is narrowly tailored to allow equity ownership only by those nonlawyer partners who actively assist the firm's lawyers in providing legal services, and does not allow for the sale of ownership shares to mere passive nonlawyer investors. The U.K. had a similar rule barring nonlawyer ownership, but under reforms implemented by the Legal Services Act of 2007 law firms have been able to take on a limited number of non-lawyer partners and lawyers have been allowed to enter into a wide variety of business relationships with non-lawyers and non-lawyer owned businesses. This has allowed, for example, grocery stores, banks and community organizations to hire lawyers to provide in-store and online basic legal services to customers.

The rule is controversial. It is justified by many in the legal profession, notably the American Bar Association which rejected a proposal to change the rule in its Ethics 20/20 reforms, as necessary to prevent conflicts of interest. In the adversarial system of justice, a lawyer has a duty to be a zealous and loyal advocate on behalf of the client, and also has a duty to not bill the client excessively. Also, as an officer of the court, a lawyer has a duty to be honest and to not file frivolous cases or raise frivolous defenses. Many in the legal profession believe that a lawyer working as a shareholder-employee of a publicly traded law firm might be tempted to evaluate decisions in terms of their effect on the stock price and the shareholders, which would directly conflict with the lawyer's duties to the client and to the courts. Critics of the rule, however, believe that it is an inappropriate way of protecting clients' interests and that it severely limits the potential for the innovation of less costly and higher quality legal services that could benefit both ordinary consumers and businesses.[4]

Multinational law firms

Law firms operating in multiple countries often have complex structures involving multiple partnerships, particularly in jurisdictions such as Hong Kong and Japan which restrict partnerships between local and foreign lawyers. One structure largely unique to large multinational law firms is the Swiss Verein, pioneered by Baker & McKenzie in 2004, in which multiple national or regional partnerships form an association in which they share branding, administrative functions and various operating costs, but maintain separate revenue pools and often separate partner compensation structures. Other multinational law firms operate as single worldwide partnerships, such as British or American limited liability partnerships, in which partners also participate in local operating entities in various countries as required by local regulations.

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