City lawyers believe the recession will push firms further from the traditional partnership business model, while Budget tax rises increase the pressure to explore corporate structures. Jeremy Hodges reports

The recession will push law firms further away from the traditional partnership model, according to new research from Legal Week.

The latest Big Question survey found that just over 70% of City partners believe firms will be forced to move away from their traditional business models as a result of changes brought about by the recession.

One in four respondents said the downturn would push firms either 'very much' or 'to a considerable extent' towards new models, with a further 46% saying firms will have to change to a fair degree.

The survey, conducted in the wake of partnership restructurings at firms including Allen & Overy, Clifford Chance and Linklaters, found that less than one-third of respondents believe the recession will make no difference to how firms are structured.

Overall, almost 20% of the roughly 100 respondents said the partnership system in place at most commercial firms today was either 'very much' or 'considerably' flawed, with a further 48% agreeing to a certain extent. Only one in three maintained that the partnership model still serves firms well.

Halliwells corporate partner Clive Garston said: "The current law firm model of partnership is not appropriate for the current environment or the future. It discourages investment and encourages short-termism."

Consequently most partners believe there will be some movement towards either incorporation or other non-partnership models over the next 10 years. Almost half (47%) said there will be either a shift or a major shift in that direction, with a further 36% conceding there will be limited movement towards non-partnership models.

However, despite the findings, few partners were willing to publicly criticise existing structures.

Lovells senior partner John Young (pictured above) argued that while there will be major structural changes, most of it will take place outside the top 50. He told Legal Week: "There will be gradual shifts but I am not sensing any great pressure on the big firms to change their structure. The concept of partner-owned firms is very much here to stay."

"You only look to public money if you need it. Moving towards a total incorporation is a very inefficient way for tax purposes to run a firm of solicitors."

Malcolm Lombers (pictured left), a corporate partner at Herbert Smith, added: "When firms originally converted to limited liability partnerships (LLPs) there were concerns that the ideals of partnership – cohesion and collegiality – would be lost. But one of the huge benefits [of an LLP] is the mix of that ethos with a corporate element which allows for greater flexibility to adapt it to individual styles of governance and respond to changes effectively."

However, the survey also found that last month's Budget could impact on how firms are structured, with the overwhelming majority (67%) believing that the Government's decision to increase the top rate of personal income tax to 50% could encourage firms to move away from partnership or attempt to convert profits into capital gains.

William Wastie, a partner in Addleshaw Goddard's professional practices group, said: "The one pressure on professional firms that are LLPs or partnerships – which could prove the greater driver for change than the Legal Services Act – is the impact of the Budget. With a 50% income tax rate it will be even less attractive for the self-employed to retain money in the business."