Law Firm Partnership Models: Swiss Verein vs Global Partnership – Whiteboard Wednesday
27th November 2018
TRANSCRIPT - Law Firm Partnership Models: Swiss Verein vs Global Partnership
Hello. Welcome to Whiteboard Wednesday. And today we're going to be talking about global partnership models, and how they work, and how they might affect your career. So, there are lots of ways to organize a law firm, but the two, sort of, models which are the book-end to this discussion are going to be the Swiss Verein, or the Swiss Association, and the LLP.
Now, we've already hit a complexity because a Swiss Verein may have a number of LLPs in it.
But let's use these two because I think there are distinct models. Right, a Swiss Verein or a Swiss Association is a Swiss vehicle or Swiss model. It was originally designed for sports clubs and things and is also used by international charities.
I think FIFA is a Swiss Verein, and so is the World Wildlife Fund and suchlike. And about 10, 15 years ago, they started to become popular with lawyers and accountants, and there's a number of reasons for that. The structure is pretty flexible, so you can create the structure, register it fairly easily, and use a number of, you know, for-profit, not-for-profit entities within it.
And it allows each office, each entity, we'll call them offices, to have financial and regulatory independence from the others. So your, say, Vienna office is not regulated together with the New York office.
Right - And so, that offers you some advantages in terms of net conflicts, one office is acting for one client in conflict with another. It also means that the regulatory rules are simplified because each office is operating on its own rules. Critically, they are also financially independent, so each office stands and falls on its own financial performance, and that means that liability is ring-fenced within each office, within each entity.
Okay? Now, those advantages pretty much feed through into the disadvantages, or the disadvantages are the flip-side of the advantages, as it were, because one of the downsides and one of the consequences is that you can't share revenue very easily. Each office is a separate financial entity. And you can't, also, shift profit.
- You can shift profit in certain, some ways, by moving costs and moving common costs, contribution to brand, etc. But even those costs are subject to the transfer pricing rules, which are international taxation rules that control cost within organizations and the value of assets moving between entities within an organization.
And what that means is it's quite difficult for people to share profit within a Swiss Verein structure. So, essentially, you can have the same firm which has got highly profitable offices or entities in it and quite low-profit entities in it, and you know, cross-subsidizing those two, evening up, if you like, what the partners are being paid and what the staff are paid, is quite difficult.
So, this structure tends to work best for firms that have a wide variety, or are in a relatively loose association, and a wide variety of different profit contributions by each business within the Verein.
Global Partnership Model
Here, I've got an LLP, which is a traditional, or now-traditional, law firm model.
Let's assume there's a single LLP for the firm's global business. And that means that all partners and lawyers work for the same firm.
So, contrasting with here where each office has financial and regulatory independence, here, all partners and lawyers work for the same firm. Profit, revenue, cost can all be shared. It's all part of a single economic entity, and that's one of its principal advantages. It's simpler to run, and the organization has an inherent ability to be able to share profit, share opportunity, share revenue, share costs.
It works more coherently as a single organization. The downside, again, consequences of the upsides in many ways, liability between the different entities is shared, so you need a strong central management to ensure those liabilities are controlled across the whole organization. Conflicts are shared, and it can also be harder to grow in those practice areas or jurisdictions which are less profitable because you add a less-profitable area to a single profit pool and you essentially create dilution.
So, those are the two broad models. Now, from a graduate recruitment point of view, or a graduate looking at a firm to join, what impact does any of this have on you? Well, anyone can take their own judgments, but I think it's probably fair to say that a limited liability partnership is likely to be better at referring work between itself because everyone is part of the same pot.
Everyone is pulling in the same direction. Work is more easily moved within the organization, and so you, sat in any given part of it, are more likely to be working on work generated for clients from any other part of the business. The Swiss Verein-structured firm may well have a much larger number of offices.
In fact, it likely would have a larger number of offices. And that can create opportunities for you if you wish to go and, you know, work in a more exotic location. Thank you very much.