Traditionally, law firms in Hong Kong operate in the form of a sole proprietorship or a general partnership. Under the Partnership Ordinance (Cap. 38), every partner in a general partnership is liable jointly and severally with other partners for all debts, liabilities and obligations of the firm incurred while he or she is a partner.
Since 2016, a law firm can choose to practise as a limited liability partnership (“LLP”). The main distinction between a general partnership and an LLP is that partners of an LLP, insofar as professional services provided by the LLP are concerned, will not, solely by reason of being partners of the firm, be personally liable for the negligent or wrongful acts or omissions, or misconduct of another partner or of an employee, agent or representative of the firm.
In Hong Kong, approximately 4 percent of Hong Kong law firms and 18 percent of registered foreign law firms are currently practising as LLPs.
Another business structure for law firms that the Law Society has been working on is incorporated legal practice with limited liability.
The Legal Practitioners Ordinance (Cap. 159) (“LPO”) has been amended to include a new Part IIAA on solicitor corporations and a new Part IIIA on foreign lawyer corporations. These new provisions in the principal legislation are yet to come into operation, pending the finalisation of operative provisions in the subsidiary legislation. Detailed provisions are being prepared in relation to the regulatory framework for solicitor and foreign lawyer corporations which require the drafting of a new set of Solicitor Corporation Rules and Foreign Lawyer Corporation Rules. They include, in relation to a solicitor corporation, governing provisions on the approval procedure and criteria for a company to be a solicitor corporation, its name, membership and directorship, its permitted scope of activities, the transfer of shares and the exercise of voting rights of members. Maintaining the independence of the legal profession is the principle on which the regulatory framework is based. To ensure that solicitor corporations are controlled and managed by solicitors, members (who should be beneficial owners of the shares) and directors of a solicitor corporation will be required to be solicitors holding an unconditional practising certificate.
Similar to the requirement on an LLP to have an overall supervising partner for each client matter, for the protection of client’s interests, under the current draft rules, a solicitor corporation will also be required to have at least one director for the overall supervision of a client matter throughout the time that the matter is handled by the corporation.
Consequential amendments necessitated by the permission of solicitor and foreign lawyer corporations are being made to the relevant subsidiary legislation of the LPO. The references to ‘firms’ will be replaced by ‘legal practice entities’ to cover corporations where appropriate and new positions in corporations like members and directors will be added to bring them into the regulatory framework. For instance, under the Trainee Solicitors Rules, the definition of ‘principal’ is proposed to be amended to include a director of a solicitor corporation.
Once the drafting of the new Solicitor Corporation Rules and Foreign Lawyer Corporation Rules and the consequential amendments to 16 pieces of subsidiary legislation are finalised, they will be sent to the Chief Justice for final approval, following which the draft legislation will be subject to a negative vetting process by LegCo.
In the meantime, practitioners may review the pros and cons of this new choice of business structure with respect to their own practices. Every legal practice is unique and there is no secret formula to selecting a firm structure. Nevertheless, the selection does require careful consideration. Factors to consider include the need to limit potential liability, tax consequences, the degree of flexibility desired by individual practices, the culture shared by the key players of a practice, their relationships and roles, the administrative work associated with a particular structure and its long term sustainability to support the growth and changes of the practice.
Tackling the complexity and workload involved in selecting the right firm structure is no small task, but it is a necessary process to ensure that the operation within the chosen structure allows the practice to flourish and supports the practitioners’ personal and professional needs.