What are the advantages of setting up a law firm as an LLP?

At Towerstone Accountants we provide specialist accountancy services for solicitors and law firms operating under SRA regulation. This article has been written to explain What are the advantages of setting up a law firm as an LLP in clear practical terms so you understand how the rules apply in day to day practice. Our aim is to help you stay compliant protect client money and make informed financial decisions.

Choosing the right legal structure is one of the most important early decisions a solicitor will make when setting up a law firm. It shapes how the firm is taxed how risk is managed how profits are shared and how the practice is perceived by regulators lenders and clients. Over the years I have worked with many solicitors weighing up this decision and one structure consistently comes up as the preferred option for many practices, the limited liability partnership or LLP.

In this article I want to explain clearly and practically the advantages of setting up a law firm as an LLP, why it has become so popular within the legal profession, and when it makes sense compared with other structures. I will focus on real world considerations rather than theory and draw on how regulators and HMRC treat LLPs in practice.

What is an LLP in simple terms

An LLP is a hybrid structure. It combines elements of a traditional partnership with the protection of limited liability. The firm itself is a separate legal entity but it is taxed in a similar way to a partnership rather than as a company.

For law firms this structure often strikes a balance between flexibility professional culture and risk management, which explains why so many medium and large practices operate as LLPs.

Limited liability protection for members

One of the most significant advantages of an LLP is limited liability. In a traditional partnership partners are jointly and severally liable for the firm’s debts and obligations. This means one partner can be exposed to the actions of another.

In an LLP:

• The LLP itself is responsible for its debts

• Members’ personal assets are generally protected

• Liability is usually limited to capital introduced and undistributed profits

For solicitors operating in a risk sensitive profession this protection is hugely important. While professional indemnity insurance provides a safety net it does not remove all exposure. LLP status adds an extra layer of security.

Retaining a partnership style culture

Many solicitors value the partnership model. It promotes shared ownership collective responsibility and collaboration. One concern when moving to a limited company structure is the loss of that culture.

An LLP allows firms to:

• Retain partnership style profit sharing

• Admit and retire members flexibly

• Allocate profits in agreed ratios

• Maintain a collegiate governance model

This makes LLPs particularly attractive to firms that want growth without becoming corporate in character.

Tax transparency and flexibility

From a tax perspective LLPs are generally treated as transparent. This means the LLP itself does not pay corporation tax on profits. Instead profits are allocated to members who are taxed individually.

This offers several advantages:

• Profits are taxed as they arise not when extracted

• Members pay income tax rather than corporation tax

• Flexibility in allocating profits between members

• Clear alignment between effort and reward

Tax treatment is governed by HM Revenue & Customs and while rules around salaried members must be considered carefully the structure remains tax efficient for many practices.

Avoiding double taxation

One reason LLPs remain popular is the avoidance of double taxation that can arise in companies.

In a limited company structure:

• Profits are taxed at corporation tax rates

• Further tax is paid when profits are extracted

In an LLP profits are taxed once at member level. This simplicity can be appealing especially for firms where members rely on regular drawings rather than retained profits.

Flexibility in profit sharing arrangements

LLPs offer significant flexibility in how profits are shared. Unlike companies where dividends usually follow shareholdings LLPs can allocate profits in almost any agreed manner.

This allows firms to:

• Reward performance rather than capital

• Adjust profit shares annually

• Reflect seniority or client following

• Encourage business development

This flexibility supports growth and helps align incentives across the firm.

Ease of admitting and retiring members

Law firms evolve constantly. New partners join and senior partners retire. LLPs are well suited to this lifecycle.

Advantages include:

• Straightforward admission of new members

• Flexible capital contribution requirements

• Planned retirement arrangements

• Clear exit mechanisms

These features make LLPs particularly suitable for succession planning and long term stability.

Regulatory acceptance within the legal profession

LLPs are well understood and widely accepted by the legal regulator. Many SRA regulated firms operate successfully in this structure.

The Solicitors Regulation Authority recognises LLPs as an established model for legal practices and regulatory processes are well developed around them.

This familiarity reduces uncertainty and helps firms focus on practice rather than structure.

Enhanced credibility with clients and lenders

Perception matters. LLPs are often viewed as established professional entities rather than sole practices or informal partnerships.

This can help with:

• Client confidence

• Tendering for larger work

• Negotiating with banks

• Attracting senior hires

While structure alone does not create credibility it can support the firm’s professional image.

Clear separation between business and personal finances

An LLP is a separate legal entity. This encourages clearer separation between business and personal finances which supports better governance.

Benefits include:

• Dedicated business bank accounts

• Formal capital accounts for members

• Clear drawings policies

• Improved financial control

This separation reduces risk and supports compliance.

Transparency through public filing

LLPs must file accounts and confirmation statements with Companies House. Some firms see this as a disadvantage but there are benefits.

Public filing:

• Encourages disciplined record keeping

• Demonstrates professionalism

• Supports lender confidence

• Creates accountability

For many firms this transparency is a positive discipline rather than a burden.

Suitability for multi partner growth

As firms grow the limitations of sole trader or simple partnership structures become apparent. LLPs scale well.

They support:

• Larger numbers of partners

• Multiple offices

• Complex governance structures

• Long term strategic planning

This makes LLPs a natural choice for firms with growth ambitions.

Managing risk between members

LLP agreements allow firms to manage risk internally by setting out:

• Decision making processes

• Capital obligations

• Profit allocation rules

• Dispute resolution mechanisms

Clear agreements reduce conflict and protect the firm during periods of change.

Alignment with professional indemnity insurance

Most insurers are comfortable with LLP structures. In some cases insurers prefer LLPs because governance and accountability tend to be clearer.

This can support:

• More predictable insurance arrangements

• Clear allocation of responsibilities

• Stronger risk management frameworks

Insurance costs are driven by many factors but structure can play a role.

Potential drawbacks to consider

While LLPs offer many advantages they are not always the right choice. There are considerations that need careful thought.

These include:

• Members paying tax on profits whether or not cash is withdrawn

• National Insurance contributions at member level

• Public filing of accounts

• Complexity compared with sole practice

An accountant should always assess suitability based on the firm’s size profitability and plans.

When an LLP may not be the best option

In some cases other structures may be more appropriate.

For example:

• Very small practices may prefer simplicity

• Firms seeking external investment may favour a company

• Practices with significant retained profits may benefit from corporation tax planning

The right choice depends on context not convention.

The accountant’s role in LLP decisions

Accountants play a central role in advising solicitors on LLP structures. This goes beyond basic tax calculations.

Support typically includes:

• Comparing structures objectively

• Modelling tax outcomes

• Advising on profit sharing

• Drafting financial aspects of LLP agreements

• Supporting registration and setup

This ensures the structure supports the firm’s strategy rather than constraining it.

Final thoughts

So what are the advantages of setting up a law firm as an LLP. In my experience they come down to balance. LLPs balance protection with flexibility tax efficiency with transparency and tradition with modern governance.

For many solicitors an LLP offers the freedom to grow collaborate and plan for the future without taking on unnecessary personal risk. It is not the only option and it should never be chosen by default, but it remains one of the most effective structures for professional legal practices.

If you are considering setting up a law firm or reviewing your current structure my advice is to look beyond habit and headline tax rates. Think about risk culture growth and succession. With the right advice an LLP can provide a strong foundation for a successful and sustainable practice.

You may also find our guidance on Should a solicitor trade as a limited company or LLP and How do partners in a law firm get paid for tax purposes useful when reviewing related SRA and accounting obligations. For a broader overview of solicitor accounting and compliance topics you can visit our solicitors accounts rules hub which brings all related guidance together.