Record number of law practices to ditch partnerships as competition hots up

A RECORD number of Scottish law firms are expected to switch from a traditional partnership structure to limited company status as they prepare for a rush of competition from the likes of AA and the Co-operative when the market is de-regulated later this year.

Alistair Morris, a member of the board of the Law Society of Scotland, said firms were looking at becoming companies as a way of retaining cash in order to boost investment in their brands, IT systems and other business areas.

Until now, only solicitors have been allowed to hold stakes in law firms. But changes introduced by the Scottish Government in late 2010 mean other professionals will be able to own legal practices too.

The final version of regulations to govern the ownership of law firms is expected to be published by SNP ministers before the summer. The Law Society believes the first firms to use the much-vaunted “alternative business structures” (ABS) will apply to do so as early as the autumn.

While legal practices do not need to become limited companies in order to take advantage of ABS, Morris believes the move would help firms to build up their finances in order to meet the expected stronger competitions.

Morris said: “If a law firm is a partnership then money is taken out of the business each year in profit share each year.

“But if a firm turns itself into a limited company then the roles of shareholders and directors are separated out. Shareholders become more focused on building the long-term value of the business rather than taking money out each year in profits.

“They pay themselves salaries and can concentrate on building the values of shares, which they could eventually sell on if they retire.”

Pagan Osborne, the 250-year-old Cupar-based firm at which Morris is chief executive, became a limited company last year.

Morris said: “Companies like the AA and the Co-op are looking at entering the Scottish legal market. These are popular brands with money to invest and so other firms need to be ready for competition.”

He said that becoming a limited company could also have benefits for firms that are looking to merge. Morris added: “The deals we’ve heard about already are just partnerships merging with partnerships to create more partnerships. If instead they came together to form a limited company, they could retain more money in the business for investment.”

His comments come amid increased talk or mergers and acquisitions within the Scottish legal sector.

McGrigors, Scotland’s largest law firm by turnover, has unveiled proposals to join forces with larger London-based rival Pinsent Masons. Last week, Edinburgh-based Tods Murray took over smaller peer Fyfe Ireland to expand its private client division.

A report published earlier this month by accountancy firm PwC revealed nearly two-thirds of firms believe a major takeover is likely within the next three years.