The legislation for establishing limited liability partnerships (LLPs) in the UK was announced in the Queen's Speech on 17 November and has now been introduced to Parliament.
After months of waiting, it seems certain that UK LLPs will be in place by the end of 2000 or early 2001. While the draft legislation and regulations contained matters that still need to be ironed out, the Department of Trade and Industry (DTI) and the tax authorities appear to be taking a very positive attitude and the few remaining defects in the draft legislation should be overcome.
The news is a major step forward in the development of a new and very helpful business structure for professional practices. It will help allay fears that major law firms operating in the UK could be forced to register outside the country. But the announcement may be too late to prevent the largest firm of solicitors reportedly becoming a US LLP, despite being dominated by UK partners.
Increasing interest in LLP status among the legal profession is clearly demonstrated by Smith & Williamson's most recent annual survey of professional firms. Of the firms surveyed, 37% said they were currently considering ways to limit their liability, compared to only 31% in 1998. Of these, nearly 90% saw LLPs as a possible or likely route. This compares to 66% last year. By contrast, incorporation or an increase in professional indemnity cover were seen as less likely options. So what are the issues that firms need to consider in deciding whether or not to convert to an LLP when they are able to?

Why convert?
The principal and, in some cases, overwhelming reason why firms might choose to become LLPs is protection from so-called 'Armageddon' legal claims. When a £600m writ arrives at their office as a result of some act by one of their partners, most partners will probably prefer to be in an LLP rather than an ordinary partnership.
Firms will need to analyse the type of work they carry out and the risks attached. They will have to look at the potential liabilities that may arise as a result of that work and take a view on the adequacy or otherwise of the professional indemnity insurance that is available.

The 'people' factor
There could be more subtle reasons to convert. Professional partnerships are 'people' businesses so personnel issues become very important. LLP status will have important implications for the recruitment of new partners – or members, as they will be in an LLP. Under the current system, there is said to be resistance to promotion within some partnerships. Some high-flying individuals would rather be highly-paid senior employees than take on the risk of becoming a partner.
While due diligence undertaken by new partners on firms they are invited to join is normally most marked by its absence, becoming a partner in any partnership is a very serious undertaking with enduring consequences.
An individual invited to join an LLP as a member will need to carry out less due diligence of a financial nature than one being invited to join a partnership. Faced with identical choices as to whether to join an LLP or a partnership of equal standing, prospective partners might take the view that they are in a better position in the LLP in terms of liabilities that may be incurred by partners they barely know.

A catalyst for change?
Any change in structure can be a catalyst for other changes. Conversion will involve drawing up a new set of documentation, which may be an opportunity for management to include provisions they would ideally like, but have not had an opportunity to persuade the partners to include. Conversion might be an opportunity to revise and draw up a fresh members' agreement and to review and formalise a change of management structure.

Does size matter?
Finally, there are what could be described as 'size and substance' issues. The legal sector broadly follows a tiered structure with a small number of very large firms, a larger number of medium-sized firms and many smaller firms.
There may be an element of peer pressure within tiers: the 'me too' syndrome, with some firms thinking that if one of their peers becomes an LLP then they should also. Other firms might consider they have a marketing advantage in not becoming an LLP.
Looking to the future, the market might settle down to a position where the more substantial firms will feel they have to become LLPs, producing a two-tier structure similar to that for companies, where typically the larger companies are plcs and small companies are limiteds.

Forces against LLPs
On the other side of the balance sheet, there is the issue of additional legal complications. In contrast to the 1890 Partnership Act, which is contained in a dozen pages, with 50 short sections and no schedules, the draft LLP bill selectively imports a large quantity of Companies Act and Insolvency Act legislation and is accompanied by 76 pages of draft regulations.
Conversion will involve drawing up fresh documentation, which partners will need to discuss and debate. There will also be negotiations, new contracts with clients, customers and suppliers. These negotiations, particularly with banks and landlords, might enforce a continued element of personal liability, which could deter some firms.
Costs
Legal costs may be fairly large and akin to incorporation costs, particularly for firms wishing to be in the first wave. Detailed financial and tax advice will also be advisable, in addition to the on-going additional costs of an audit – not to mention disruption costs and utilisation of management time caused by debates among partners.

Other protective measures
Some firms may feel they do not need the additional protection of limited liability because they have taken other measures. They may feel that they have limited all their identifiable liabilities through contract with their clients or that they have adequate insurance to cover every conceivable claim, together with other protective measures such as systems of quality control, training and procedures.

Privacy, culture and ethos
A further argument against conversion to LLP status is the degree of privacy and mystique afforded by existing arrangements. At present, in the absence of published accounts, the only financial information generally made available to third parties is that which the firm chooses to make available. The potentially explosive issue of disclosure of remuneration may be a deterrent to some firms, as will disclosure of home addresses.
There might be issues of culture and ethos. Going into an LLP can imply that all partners will not necessarily contribute to a loss incurred by one partner. This might damage a cohesive culture – although an argument for LLPs, as opposed to incorporation, is that the partnership ethos is more likely to continue.
There is also the whole issue of who would willingly give second or third opinions if the consequence is that a partner may have his name added to a writ. Each firm will have to weigh up these arguments and decide what is right for them.
Simon Mabey is chairman of the professional partnerships group at Smith & Williamson chartered accountants and a member of the APP working party on LLPs.