Pros and cons of incorporation for solicitors & law firms

Feb 14, 2015
Author: Simon Bladen
Simon is one of the firm's Audit Partners. Simon is responsible for looking after the firm’s legal, charitable and not-for-profit clients.
legal accountants

The pros and cons of incorporation for solicitors & law firms

The default model for a solicitor practice was historically the partnership structure. However, since the introduction of the Solicitors’ Incorporated Practice Rules in the early 1990s, allowing solicitor practices to incorporate, law firms are now also operating as limited companies and LLPs. The take up by law firms adopting the LLP model in the UK has been particularly impressive. Yet, many solicitors are still unclear on the pros and cons of incorporation and the costs of making the wrong decision for your practice.

Full incorporation can bring benefits to the firm, but there are some disadvantages that must be considered. The structure of your firm and whether it works for you is something only you and your fellow partners can decide. If incorporation is the right route for your firm, Hawsons’ specialist team can help you achieve that status as efficiently as possible.

Limitation of liability

Sole trader/traditional partnership

Liability is unlimited

LLP and Limited company

For LLPs and Limited Companies, liability is limited to:

  • The partner’s capital account plus any unallocated profits; or
  • The share capital in the company

An LLP also has joint and several liability for stamp duty land tax.

Personal liability can still fall on the members/directors if they are proven to have acted negligently.

Banks will often require personal guarantees for borrowing depending on the amounts involved.

Sale of practice

Sole trader/traditional partnership and LLP

Buyers will generally prefer to buy the assets and goodwill because it can mitigate the transfer of potential liabilities. This can happen on the purchase of shares, where a buyer acquires all the assets and liabilities in the company.

Limited company

Conversely, sellers usually prefer to sell shares. This is generally seen as cleaner to the seller and also avoids double tax pitfalls, whereby income is taxed within the company and then again on the individual.

Pension arrangements

Sole trader/traditional partnership and LLP

Limited to a personal pension arrangement (E.g. Stakeholder pension, personal pension or self-invested personal pension).

Limited company

A wider range of pension arrangements are available (E.g. Executive pension plan, small self-administered scheme or a group personal pension plan)

Other pros and cons

This article has given a brief look at the pros and cons of incorporating. For more information on the impacts on:

  • Flexibility
  • Accounts requirements
  • Taxation on profits and owners income
  • Capital gains tax
  • Inheritance tax

For more information on the other pros and cons, please download our free guide.

More from our legal sector experts

You can find all of our latest legal articles here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

About this Author

Simon Bladen, Partner

Simon Bladen is the partner responsible for looking after the firm’s legal clients and has worked at Hawsons throughout his career. For more information or advice on anything covered in this article, please contact Simon on or 0114 226 7141.[/author_info]

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