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Alternative business structures in the legal profession

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Media Release

Published on

Less than a decade ago, operating a legal practice other than as a sole practitioner or in a partnership structure was considered a real threat to professionalism by some concerned with the regulation of lawyers. It was thought that incorporation and the involvement of non-lawyers as owners and managers of an incorporated legal practice threatened the integrity of the role lawyers play in the administration of justice.

Although we have come a long way in a relatively short period, there is still more to be done. The National Legal Reform process which is currently underway provides a unique opportunity to broaden the range of business structures that can be utilised by legal practitioners by recognising the positive contribution incorporation has played in advancing professional standards and the management of law practices.

It is now the case that the majority of newly formed legal practices are opting to take advantage of the benefits of incorporation.

That the profession has embraced the concept of conducting the business of a law practice via the incorporated legal practice model (enshrined in all Australian jurisdictions save South Australia) increasingly eagerly should be no surprise when the benefits are considered:

  • Limited liability
  • Less disruptive entry and exit from ownership
  • Inclusion of non-lawyer contributors to the success of the enterprise as owners and
  • Greater capacity to raise debt and equity.

While incorporation has a number of advantages, it highlights the tensions between the role the legal profession plays in the administration of justice and upholding the rule of law, and the demands on legal practitioners who are also charged with responsibility for conducting a successful business enterprise.

It is for that reason that the business structures employed by legal practitioners have and should continue to be regulated. The Taskforce driving the National Legal Profession Reform Initiative being undertaken through COAG seems to be on track to strike a balance between these concerns.

Whilst further refinements to the draft Bill will provide a strong platform for alternative business structures to continue to develop it is still not too late for the reform process to achieve a result closer to its stated regulatory objectives.

The regulatory objectives proposed by the Taskforce are*:

  1. to facilitate the provision of legal services through a range of business structures
  2. to ensure that any particular type of business structure does not impede a law practice and the legal practitioners within it from complying with the National Law, National Rules and other professional obligations of Australian legal practitioners and
  3. to ensure that consumers of legal services are not disadvantaged as a result of the business structure through which a law practice provides legal services.

The reform process will prove to be a missed opportunity for the advancement of these policy objectives if the reforms fail to include alternatives to incorporation such as limited liability partnerships. The process will also come up short if it is unable to secure a clear path through the required stamp duty and tax reform for legal practices currently operating as partnerships and seeking to incorporate but prevented from doing so, because of the financial implications and uncertainly such a change currently entails.

There is no evidence that providing legal services through an incorporated legal practice has or will lead to a decrease in professional standards. In fact the available evidence is to the contrary.

A recent study found that the appropriate management systems (AMS) model,^ with its emphasis on self audit requirements, has produced a higher level of awareness of risk management and the need to monitor,  supervise and improve legal services to clients.+

The authors of the study concluded that this-education towards compliance approach-has significantly impacted on the internal management systems of the firms and has had a positive impact on client satisfaction levels, reducing complaint numbers.**

It is this, perhaps unexpected, experience of the regulation of incorporated legal practices that has led the Taskforce to propose that the AMS should be extended to all legal practices.

The current form of the proposed new laws requires further work to ensure that the regulatory response is proportionate and appropriate to the challenge of balancing professional obligations with the commercial imperatives in legal practices of different types and sizes. However, it is clear that clients will be the beneficiaries of a regulatory framework which encourages constant improvement in performance against accepted standards for professional conduct in the way that the AMS model seeks to do.

The introduction of incorporated legal practices over the last several years has made an important contribution to the Australian Legal sector, but the job is not yet complete.The National Legal Reform process gives us the opportunity to take the next step, in positioning the Australian legal services profession as the leader in the regulation of legal practitioners.