A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service provided by a law firm is to advise clients (individuals or corporations) about their legal rights and responsibilities, and to represent their clients in civil or criminal cases, business transactions and other matters in which legal assistance is sought.
Arrangements
Law firms are organized in a variety of ways, depending on the jurisdiction in which the firm practices. Common arrangements include:
- Sole proprietorship, in which the attorney is the law firm and is responsible for all profit, loss and liability;
- General partnership, in which all of the attorneys in the firm equally share ownership and liability;
- Professional corporations, which issue stock to the attorneys in a fashion similar to that of a business corporation;
- Limited liability company, in which the attorney-owners are called "members" but are not directly liable to third party creditors of the law firm;
- Professional association, which operates similarly to a professional corporation or a limited liability company;
- Limited liability partnership (LLP), in which the attorney-owners are partners with one another, but no partner is liable to any creditor of the law firm nor is any partner liable for any negligence on the part of any other partner. The LLP is taxed as a partnership while enjoying the liability protection of a corporation.
Restrictions on ownership interests
In many countries, including the United States and the United Kingdom, there is a rule that only lawyers may have an ownership interest in, or be managers of, a law firm. Thus, law firms cannot quickly raise capital through initial public offerings on the stock market, like most corporations. In the United States this rule is promulgated by the American Bar Association and is adhered to in all U.S. jurisdictions, except the District of Columbia. The U.K. has a similar rule, but in recent years there have been discussions about relaxing it in order to allow law firms to expand more rapidly.
The rule was created in order to prevent conflicts of interest. In the adversarial system of justice, a lawyer has a duty to be a zealous and loyal advocate on behalf of the client, and also has a duty to not bill the client excessively. Also, as an officer of the court, a lawyer has a duty to be honest and to not file frivolous cases or raise frivolous defenses. A lawyer working as a shareholder-employee of a publicly traded law firm would be strongly tempted to evaluate decisions in terms of their effect on the stock price and the shareholders, which would directly conflict with the lawyer's duties to the client and to the courts.
Structure and promotion
Partnership
Law firms are typically organized around partners, who are joint owners and business directors of the legal operation; associates, who are employees of the firm with the prospect of becoming partners; and a variety of staff employees, providing paralegal, clerical, and other support services. An associate may have to wait as long as 9 years before the decision is made as to whether the associate "makes partner". Many law firms have an "up or out policy" (pioneered around 1900 by partner Paul Cravath of Cravath, Swaine & Moore): associates who do not make partner are required to resign, either to join another firm, go it alone as a solo practitioner, go to work in-house in a corporate legal department, or change professions (burnout rates are very high in law).
Making partner is very prestigious, especially due to competition at a large or mid-sized firm. Such firms may take out advertisements in legal newspapers to announce who has made partner. Traditionally, partners shared directly in the profits of the firm, after paying salaried employees, the landlord, and the usual costs of furniture, office supplies, and books for the law library (or a database subscription). Partners in a limited liability partnership can largely operate autonomously with regards to cultivating new business and servicing existing clients within their book of business. However, many large law firms have moved to a two-tiered partnership model, with equity and non-equity partners. Equity partners are considered to have ownership stakes in the firm, and share in the profits (and losses) of the firm. Non-equity partners are generally paid a fixed salary (albeit much higher than associates), and they are often granted certain limited voting rights with respect to firm operations. The world's oldest continuing partnership is that of Cadwalader, Wickersham & Taft, founded in 1792 in New York City.
Termination of one's partnership
It is rare for a partner to be forced out by fellow partners, although that can happen if the partner commits a crime or malpractice, experiences disruptive mental illness, or is not contributing to the firm's overall profitability. However, some large firms have written into their partnership agreement a forced retirement age for partners. This age can be anywhere from age 65 on up. In contrast, most corporate executives are at much higher risk of being fired, even when the underlying cause is not directly their fault, such as a drop in the company's stock price.
"Of counsel" role
In the United States, Canada and Japan, many large and midsize firms have attorneys with the job title of "counsel", "special counsel" or "of counsel." As the Supreme Court of California has noted, the title has acquired several related but distinct definitions which do not easily fit into the traditional partner-associate structure. These attorneys are employees of the firm like associates, although some firms have an independent contractor relationship with their of counsel. But unlike associates, and more like partners, they generally have their own clients, manage their own cases, and supervise associates. These relationships are structured to allow more senior attorneys share in the resources and "brand name" of the firm without being a part of management or profit sharing decisions. The title is often seen among former associates who do not make partner, or who are laterally recruited to other firms, or who work as in-house counsel and then return to the big firm environment. At some firms, the title "of counsel" is given to retired partners who maintain ties to the firm. Sometimes "of counsel" refers to senior or experienced attorneys, such as foreign legal consultants with experience in international law and practice and their own clients. They are hired as independent contractors by large firms as a special arrangement, which may lead to profitable results for the partnership. In these situation "of counsel" could be considered to be a transitional status in the firm.
Mergers and acquisitions between law firms
Mergers, acquisitions, division and reorganizations occur between law firms as in other businesses. The specific books of business and specialization of attorneys as well as the professional ethical strictures surrounding conflict of interest can lead to firms splitting up to pursue different clients or practices, or merging or recruiting experienced attorneys to acquire new clients or practice areas. Results often vary between firms experiencing such transitions. Firms that gain new practice areas or departments through recruiting or mergers that are more complex and demanding (and typically more profitable) may see the focus, organization and resources of the firm shift dramatically towards those new departments. Conversely, firms may be merged among experienced attorneys as partners for purposes of shared financing and resources, while the different departments and practice areas within the new firm retain a significant degree of autonomy.
Size
Law firms range widely in size. The smallest law firms are sole practitioners (lawyers practicing alone), who form the vast majority of lawyers in nearly all countries.
Smaller firms tend to focus on particular specialties of the law (e.g. patent law, labor law, tax law, criminal defense, personal injury); larger firms may be composed of several specialized practice groups, allowing the firm to diversify their client base and market, and to offer a variety of services to their clients.
Large law firms usually have separate litigation and transactional departments. The transactional department advises clients and handles transactional legal work, such as drafting contracts, handling necessary legal applications and filings, and evaluating and ensuring compliance with relevant law; while the litigation department represents clients in court and handle necessary matters (such as discovery and motions filed with the court) throughout the process of litigation.
United States development
First law firms
The United States pioneered the concept of the large law firm in the sense of a business entity consisting of more than one lawyer. The first law firms with two or more lawyers appeared in the U.S. just prior to the American Civil War (1861-1865). The idea gradually spread across the Atlantic to England, although "English solicitors remained a corps of solo practitioners or very small partnerships until after World War II." Today, the United States (and the United Kingdom) have many small firms (2 to 50 lawyers) and midsize firms (50 to 200 lawyers).
Boutique law firms
Lawyers in small cities
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