Partnership has been ingrained in this profession for hundreds of years. The Law Society traditionally took the view that professionals should be personally liable and have altered this view only recently. But the have and we can now perhaps begin to see the beginning of the end. It is actually far from perfect for our times and if it had never been thought of I suspect that few would even consider using it as their chosen business structure.

The pressures that can build up are well-known. Partners do not always get on very well and I have known partnerships in which virtual all-out war was seriously hampering the business. This can also happen in a corporate structure but if they do you have a far clearer picture of who owns what and who is responsible for what. The much clearer hierarchy means that whenever necessary the needs of the business can be put first and effective things can be done to deal with problems.

The main features of partnership are these:

1) Once initial investment is complete ownership is usually equally shared between partners
  regardless of the input of each. This can lead to tensions when one partner runs a profitable
  department and another a less successful one.
2) There is a conflict between obtaining the best lawyers and/or the best managers and those people
  with capital to invest. Partnership is seen as the pinnacle of achievement and yet depends on
  having that capital. There is therefore the risk that highly able solicitors may be lost to a firm simply
  because of their lack of personal resources.
3) There is no need to publish accounts and so lay bare one’s profitability, or lack of it, either of which
  could sensitive.
4) Because the partners are the business, the credit-worthiness of a firm can be dragged down if one
  has personal money problems. Good partnership agreements provide for this so that other
  partners can minimize damage.
5) Partners are personally at risk and liable for any and all liabilities of the partnership. It is therefore
  possible for one partner to do something that will cause serious financial grief to others, even
  though they were not involved at the time. Again, good partnership agreements may seek to control
  this but it may be almost impossible. In purely practical terms, the others can only seek redress to
  the extent of that partner’s assets.
6) Partners are essentially self-employed and consequently face a slightly easier tax regime than
  PAYE (although I stress I am not an accountant. Anyone needing definitive advice on this must
  consult a competent accountant. If they receive advice that conflicts with this please tell us all!)
7) The law Society is to allow the investment of capital from other than solicitors but a partnership
  structure would make this impossible (?). This fact alone may ultimately spell the end for
  partnerships.

Some firms still reply on partnership law but it is absolutely essential that a proper partnership agreement is in place. To put it simply, how can you play the game unless you understand the rules? The issues that arise when something goes wrong, such as a death or serious injury can do dreadful damage otherwise. I once was involved in a firm in which a partner sadly died. There was no agreement in place and the ensuing negotiations between the remaining partners and the family and executors were painful, with neither side feeling that they had achieved a satisfactory conclusion.

The issue of capital is always a contentious one, with some partners drawing down capital accounts and others then resenting the fact that they are funding a disproportionate amount of the firm's working capital. Partners may also resent sharing profits equally with those that perform poorly.

The other major area for conflict surrounds departing partners. The amount of capital that I see people taking, usually on retirement, can weaken a partnership to a horrifying degree and I have seen firms brought almost to their knees in this way. I know of one firm right now that is in the process of paying out a partner who resigned from partnership and is still working for the firm as a consultant. The sum involved is eye-watering and I have serious doubts as to whether the firm, already far from profitable, can survive this huge "hit". Partnership agreements must grasp this nettle and indeed some now use a different structure, allowing new partners to invest in the firm over a period of time and then paying nothing out on departure. Retirement can be funded in many ways and the possible stripping of a firm is not the best of them, but it can take quite a change of attitude within a partnership to achieve this change. It's a bit like fagging in public schools; those that had been fags did not want to give up the luxury of having a peronal servant when they became senior as they saw it as their reward for those early years of being at a senior boy's beck and call so the practice took quite a while to die out. In the same way, partners that invested expecting to be able to withdraw later will understandably be reluctant to accept change, unless something really meaningful can be put in as the alternative.

Perhaps this will prove to be one of the drivers for incorporation. In a company a shareholding would replace a partner's capital. It could only be realised when those shares could be sold and their value would directly reflect both the underlying asset value and the profitability of the firm. No longer would the firm have to watch as its working capital was stripped - the money would have to come from a new source. Even better, a retiring partner with confidence that the firm was well-run could leave his shares in if he wished, continuing to enjoy the dividend as his retirement income. The market would decide so many things that are currently highly emotive.

There can be absolutely no substitute for a sound agreement and this should then be backed up by insurance policies that provide both for the firm (often called key man insurance), covering the cost of having to suddenly pay out a partner's capital and find an urgent replacement to maintain revenues , and the partner's dependents. In this way everyone knows exactly what to expect either in a normal ongoing business situation or in the event of a tragedy and can plan around the agreement. If, for example, a partner wishes to provide additional life cover he or she can do so in the knowledge of what is already in place.

Alternatives are limited liability partnerships and incorporation. Some thoughts on these are on the following pages.