A revolution was set in motion on 6 April 2001 when the Limited Liability Partnership (LLP) Act 2000 came into force, but it had very little to do with the limited liability issues in which the legislation has its origins. Partners in law firms and other professions that decide to become LLPs will have to undergo a complete "mind set" change, and many of them are not going to like it; indeed, many are going to find it very difficult.
As members of an LLP, they will have to forget that they were once partners. They will have to think corporately, as shareholders in a corporation, and they will have to behave and act as part of a corporation. If they continue in their old ways of thinking and acting like partners, they could even lose their privilege of limited liability. Partnership law is specifically excluded under the new act. Most professional firms are partnerships, but for many large firms, partnership is an outdated form of business organisation in the modern business environment, as many managing partners have come to realise to their cost. So what has changed?
Despite the name, LLPs will not be partnerships. They will be corporate entities, separate from their members. A firm's business will be owned by the LLP. Ownership will for the first time be divorced from the professional "workers" in the business and a true corporate structure will be possible for a UK law firm. LLPs will be able to enter into contracts and grant charges over their assets. Many provisions from company and insolvency law have been incorporated into the law on LLPs, which will be like companies.
In traditional partnerships, managing partners are rarely given any authority at all – they have to make it themselves by earning the respect of their partners. A chief executive in industry, if asked to run a large law firm, will likely say: "I'll take the job on the basis that when I tell the partners what to do, they'll do it." An intriguing prospect, is it not?
At present, given partnership culture, such instructions or even requests are very unlikely to be acceptable, and this is one of the main things presently preventing law firms from being able to recruit the best management talent.
Surely law firms (and everyone associated with them – partners, staff and clients) deserve to be more efficiently and effectively managed in the future as they grow in size and complexity, and not be held back because "buy-in" to important changes cannot be obtained from every partner in the firm.
Law firms are going to have to change, and change rapidly, to keep pace with the changes in business and society. But they will not be able to do so if law firm leaders continue to have the millstone of outdated partnership organisations and culture hanging around their necks. So how will this begin to change with LLPs?
Crucial to change is the divorce between ownership and workers. Partners are presently owners and workers and many find it difficult to come to terms with being less involved or excluded from management decisions as their firm grows. LLPs will provide the ability to divorce ownership and the management of the firm from the "workers/shareholders", as in an existing corporate situation. The business will belong to the LLP. Members (not partners) will have shareholdings. Law firms will now have the opportunity to start with a clean sheet and structure their organisations in a corporate manner, for the first time introducing effective line management and accountability.
Many law firms are very large businesses and still growing, but present partnership structures do not do justice to the needs of these businesses or the people whose livelihoods depend on them.
UK law firms should grasp the LLP opportunity for what it is – not just a means to obtain limited liability, important as that is, but as a long overdue opportunity to finally restructure themselves and to become the competitive businesses they now need to be.
Long live the revolution!
Peter Scott is director of professional practices at Horwath Consulting and former managing partner of Eversheds London