Are We Ready to Have Law Firms Publicly Owned and Shares in Law Firms Publicly Traded?

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As the United Kingdom marches towards the date upon which law firms may be owned by non-lawyers and the date upon which law firms may actually be publicly traded, the time has come to more seriously consider the viability of non-lawyer ownership of law firms in the United States.

Capital is the lifeblood of law firms. Law firms traditionally relied on two forms of raising capital: Traditional bank lending and partner capital contributions. As the credit markets in the United States have dramatically tightened, banks’ underwriting criteria have become increasingly tighter and lending has become far more difficult for law firms. Additionally, banks are monitoring their law firm borrowers extremely closely. Lending covenants, which previously were easily waived are now largely carved in to stone.

Law firms have been increasing capital contribution requirements from their partners. In some instances, law firms are even requiring capital contributions from non-equity partners, who are in essence, paying to get a job. Raising funds through capital contributions also raises other irksome issues: First, to the extent that increased capital requirements derive from deductions in profit distributions, partners are actually taxed on income they do not even receive. Thus, the cost to individual partners in making these capital contributions imposes an added cost. Second, lateral partners, historically largely made their capital contributions through a bank with which the law firm had a friendly relationship. In today’s economic climate, pure friendship is not a valued coin of the realm. In making such loans, banks also view such loans as added exposure to a single borrower, namely the law firm.

Is investment by non-lawyers in law firms the answer? Should law firms go public? We have serious reservations about whether equity investment in law firms by non-lawyers will easily find their way to commercial law firms.

But, we will surely watch the British experiment closely.

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Published In: Business Organization Updates, Firm Marketing Updates, Professional Practice Updates, Mergers & Acquisitions Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jerome Kowalski, Kowalski & Associates | Attorney Advertising

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Jerome Kowalski
Kowalski & Associates

Jerry Kowalski is the founder of Kowalski & Associates, which provides law firm management... View Profile »


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