How Are Law Firms Structured?

Learn more about law firms and how they are usually structured as well as the set of advantages and disadvantages that come with it before starting your own.

Top view of a team of lawyers during a meeting.

A law firm is usually a large firm or an entity formed by one or more practicing lawyers in order to engage in the practice of law. They offer many services including advising clients with regards to their legal services and responsibilities, their business transactions, and other matters that require legal assistance.

The organizational structure of the law firm is as such that it has a hierarchical system that is explained below.

Managing Partner

A senior level manager

This is a senior level person or a founding lawyer of the law firm who sits at the top of the hierarchy. He/she heads has an executive committee of other senior people and plays the lead role in the main affairs of the firm. This person is the leading force behind the firm’s strategic vision and helps the firm achieve what it had initially planned to

The managing partner has a very wide scope of responsibilities. They mainly focus on the overall direction of the firm, the skills and leadership qualities necessary for the success of the firm, and organizing legal specialty areas. The managing partner is the main planner of all the events. They are responsible for devising the policies, supervising the whole system, and appraising the results.

If the managing director has hired a non-lawyer to handle the administrative part of the firm, then this sheds off a lot of responsibility on the managing partner’s part as the administrative role then requires minimal time from him. The managing partner is mainly accountable to the executive of their management committee, other partners, and committees of the firm.

Law Firm Partners

These are also called shareholders of the firm and are attorneys who are part owners and operators of the firm as well. There are many types and structures of the law firm.

Sole proprietorships are forms that just have one attorney. Apart from this structure, there are general partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs), and professional associations. These will be discussed in detail below.

Sole Proprietorship Law Firm

A sole proprietorship law firm is formed when an attorney decides to do business under his own name and not as a separate legal entity. For this type of organizational structure, there are no formal requirements. It is very easy to form and also has very low costs associated with it. With that said, a sole proprietorship law firm has personal liability and tax liability.

Adding to that, there are no laid out requirements to form a sole proprietorship. Some places of the world may require a license of doing business to form a sole proprietorship law firm. Other structures usually require a board of directors to do business but in a sole proprietorship, the individual holds complete control. The owner decides how will run the entire business, along with managing the advertising and the client relationships, and this is why they have the right to get all the profit in the end too. The biggest drawback of this kind of structure is that there is unlimited liability. In case anything goes wrong and the firm starts incurring losses, all of that has to be borne by the owner. His personal assets are risked majorly.

General Partnership Law Firm

Two people shaking hands

Mutual understanding between two or more parties that are interested in running a law firm together creates this structure. They work together by having a shared purpose in the form of some arrangement. Generally, most partnerships have formal agreements between them and that is how they run a business, this kind of structure might even work with an informal agreement. The law firms working as general partnerships without a written operating agreement between them are known as general partnerships. They have three main characteristics and these are written below

  • Each partner has unlimited liability which means that in the case of a loss, they will have to pay by selling their own personal assets
  • All partners have management powers and can take decisions on behalf of the business operations
  • Each partner has to individually pay taxes depending on their share of profits

The main advantage of a general partnership law firm is that they can deduct losses from their personal income taxes. General partnerships are also very simple to set up, create, and run compared to the others. With increased flexibility of general partnership firms, these are very easy to run. However, unlimited liability is a major drawback. It is also relatively harder to get outside investment into a general partnership due to the fact that it has a high level of liability and lots of risk.

Limited Liability Companies

These law companies have to register with the Companies House and HMRC. They also have to file their accounts annually or at the time when there is an important change being made in the business. The advantage of this structure is that in case of insolvency, they offer a reduction in partnership. Contrary to popular belief, they do not offer complete coverage. If they have indulged in any unlawful trading, then they will be claimed for it. In terms of taxation, corporation tax is applied to profits. These are much lesser than income tax rates. Salaries paid out to the employees are also subject to income tax. In terms of the business agreements, the articles of association, along with the shareholder’s agreement determine the arrangements.

Limited Liability Partnerships

These must also register with the Companies House and HMRC, just like the limited companies and also have to make accounts periodically or as and when required due to certain events. In terms of liability, limited liability partnerships ease the burden on each partner in case of insolvency or bankruptcy by reducing the liability. Members may also get recovery of payments. When a limited liability partnership law firm is being started, they may have a requirement to give personal guarantees. Start-up costs can be covered initially due to this fact. Partners in this type of an arrangement face income tax at the standard rates on the share of their profit and they have to pay it in due time.

Associates

Associates are the young lawyers who can eventually become partners in the long run. Law firms tend to distinguish between these attorneys by dividing them into junior and senior associates. This is based on their level of education and their level of experience or practice in the field. On a general level, a lawyer has to work for around 7 to 8 years at the associate position to eventually end up getting a partnership rank. Whether or not the associate becomes a partner depends on a lot of factors like his client base, his work ethic and his legal acumen.

Of Counsel Attorneys

These typically are not the employees of the law firm. They work as independent contractors and are very senior experienced lawyers who have their own ways of doing business. With good reputation in the legal community, they have a very extensive client base. Some of these attorneys are also retired lawyers who have spent their life as lawyers and are now making use of their knowledge and skills by being ‘of counsel attorneys.’ These attorneys have a very close relationship with the firm. The law firm usually never intends to make them the partners of the firm but always wants them to be employees continually to help with the firm’s dealing since they are so experienced.

Summer Associates

A young summer associate

These are also called summer clerks and are those who are either interning with the law firm or are only working with the firm for a short period of time in order to learn how things work in the firm. These young people are still in a law school and usually aim to grow up to become successful lawyers after knowing how to run a law firm successfully. The law school teaches them the basics of how law firms work. In larger law firms, these people can be paid, but usually, they are not paid and are just being hired to learn how to work in such a firm. The larger firms have very highly competitive summer associate programs that pay really well and a lot of young aspiring lawyers want to be a part of those teams. If they perform well while they are working with the firm, they might even be offered permanent positions in the firm.

 

This is how law firms are usually structured. Each structure has its own sets of advantages and disadvantages. Someone who is planning on starting their own law firm should have a clear idea of how law firms are structured. Only then can they make the right decision based on what they know about each structure and how they plan on going about it.


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