A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients (individuals or corporations) about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other matters in which legal advice and other assistance are sought.
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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 the attorneys who are members of the firm share ownership, profits and liabilities;
- 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 (prohibited as against public policy in many jurisdictions but allowed in others in the form of a "Professional Limited Liability Company" or "PLLC");
- 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, 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. They must either raise capital through additional capital contributions from existing or additional equity partners, or must take on debt, usually in the form of a line of credit secured by their accounts receivable.
In the United States this complete bar to nonlawyer ownership has been codified by the American Bar Association as paragraph (d) of Rule 5.4 of the Model Rules of Professional Conduct and has been adopted in one form or another in all U.S. jurisdictions, except the District of Columbia. However, D.C.'s rule is narrowly tailored to allow equity ownership only by those nonlawyer partners who actively assist the firm's lawyers in providing legal services, and does not allow for the sale of ownership shares to mere passive nonlawyer investors. The U.K. had a similar rule barring nonlawyer ownership, but under reforms implemented by the Legal Services Act of 2007 law firms have been able to take on a limited number of non-lawyer partners and lawyers have been allowed to enter into a wide variety of business relationships with non-lawyers and non-lawyer owned businesses. This has allowed, for example, grocery stores, banks and community organizations to hire lawyers to provide in-store and online basic legal services to customers.
The rule is controversial. It is justified by many in the legal profession, notably the American Bar Association which rejected a proposal to change the rule in its Ethics 20/20 reforms, as necessary 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. Many in the legal profession believe that a lawyer working as a shareholder-employee of a publicly traded law firm might be 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. Critics of the rule, however, believe that it is an inappropriate way of protecting clients' interests and that it severely limits the potential for the innovation of less costly and higher quality legal services that could benefit both ordinary consumers and businesses.
Multinational law firms
Law firms operating in multiple countries often have complex structures involving multiple partnerships, particularly in jurisdictions such as Hong Kong and Japan which restrict partnerships between local and foreign lawyers. One structure largely unique to large multinational law firms is the Swiss Verein, pioneered by Baker & McKenzie in 2004, in which multiple national or regional partnerships form an association in which they share branding, administrative functions and various operating costs, but maintain separate revenue pools and often separate partner compensation structures. Other multinational law firms operate as single worldwide partnerships, such as British or American limited liability partnerships, in which partners also participate in local operating entities in various countries as required by local regulations.
Financial indicators
Three financial statistics are typically used to measure and rank law firms' performance:
- Profits per partner (PPP): Net operating income divided by number of equity partners. High PPP is often correlated with prestige of a firm and its attractiveness to potential equity partners. However, the indicator is prone to manipulation by re-classifying less profitable partners as non-equity partners.
- Revenue per lawyer (RPL): Gross revenue divided by number of lawyers. This statistic shows the revenue-generating ability of the firm's lawyers in general, but does not factor in the firm's expenses such as associate compensation and office overhead.
- Average compensation of partners (ACP): Total amount paid to equity and nonequity partners (i.e., net operating income plus nonequity partner compensation) divided by the total number of equity and nonequity partners. This results in a more inclusive statistic than PPP, but remains prone to manipulation by changing expense policies and re-classifying less profitable partners as associates.
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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 11 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 and 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 at large or midsized firms, due to the competition that naturally results from higher associate-to-partner ratios. Such firms may take out advertisements in professional publications 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 regard to cultivating new business and servicing existing clients within their book of business.
Partner compensation methods vary greatly among law firms. At major United States law firms, the "compensation spread" (ratio between the highest partner salary and lowest partner salary) among firms disclosing information ranges from 3:1 to 24:1. Higher spreads are intended to promote individual performance, while lower spreads are intended to promote teamwork and collegiality.
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 oldest continuing partnership in the United States is that of Cadwalader, Wickersham & Taft, founded in 1792 in New York City. The oldest law firm in continuous practice in the United States is Rawle & Henderson LLP, founded in 1783 in Philadelphia.
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, which 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. Worldwide, partner retirement ages can be difficult to estimate and often vary widely, particularly because in many countries it is illegal to mandate a retirement age.
"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 people who work for the firm, like associates, although some firms have an independent contractor relationship with their 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 to 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 specialized experience in particular aspects of law and practice. They are hired as independent contractors by large firms as a special arrangement, which may lead to profitable results for the partnership. In certain situations "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 structures 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.
Law firm mergers tend to be assortative, in that only law firms operating in similar legal systems are likely to merge. For example, U.S. firms will often merge with English law firms, or law firms from other common law jurisdictions. A notable exception is King & Wood Mallesons, a multinational law firm that is the result of a merger between an Australian law firm and a Chinese law firm.
Though mergers are more common among better economies, slowing down a bit during recessions, big firms sometimes use mergers as a strategy to boost revenue during a recession. Nevertheless, data from Altman Weil indicates that only four firms merged in the first half of 2013, as compared to eight in the same period in 2012, and this was taken by them as indicating a dip in morale regarding the legal economy and the amount of demand.
Size
Law firms can vary widely in size. The smallest law firms are 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 handles necessary matters (such as discovery and motions filed with the court) throughout the process of litigation.
Anglo-American development
Boutique law firms
Lawyers in small cities and towns may still have old-fashioned general practices, but most urban lawyers tend to be highly specialized due to the overwhelming complexity of the law today. Thus, some small firms in the cities specialize in practicing only one kind of law (like employment, antitrust, intellectual property, telecommunications or aviation) and are called boutique law firms.
Virtual Law Firms
A 21st Century development has been the appearance of the virtual law firm, a firm with a virtual business address but no brick & mortar office location open to the public, using modern telecommunications to operate from remote locations and provide its services to international clients, avoiding the costs of maintaining a physical premises with lower overheads than traditional law firms. This lower cost structure allows virtual law firms to bill clients on a contingency basis rather than by billable hours paid in advance by retainer.
"Megafirms" or Biglaw
The largest law firms have more than 1,000 lawyers. These firms, often colloquially called "megafirms" or "biglaw", generally have offices on several continents, bill US$750 per hour or higher, and have a high ratio of support staff per attorney. Because of the localized and regional nature of firms, the relative size of a firm varies.
"Full service" firms
The largest firms like to call themselves "Big-Law" firms because they have sections specializing on each category of legal work, which in the U.S. usually means mergers and acquisitions transactions, banking, and certain types of high-stakes corporate litigation. These firms rarely do plaintiffs' personal injury work. However the largest law firms are not very large compared to other major businesses (or even other professional services firms). In 2008, the largest law firm in the world was the British firm Clifford Chance, which had revenue of over US$2 billion. This can be compared with $404 billion for the world's largest firm by turnover Exxon Mobil and $28 billion for the largest professional services firm Deloitte.
Worldwide
The largest law firms in the world are headquartered primarily in the United Kingdom and the United States. However, large firms of more than 1,000 lawyers are also found in Australia (Minter Ellison (1,500 attorneys), China (Dacheng 2,100 attorneys) and Spain (Garrigues, 2,100 attorneys). The American system of licensing attorneys on a state-by-state basis, the tradition of having a headquarters in a single U.S. state and a close focus on profits per partner (as opposed to sheer scale) has to date limited the size of most American law firms. Thus, whilst the most profitable law firms in the world remain in New York, four of the six largest firms in the world are based in London in the United Kingdom. But the huge size of the United States results in a larger number of large firms overall - a 2003 paper noted that the United States alone had 901 law firms with more than 50 lawyers, while there were only 58 such firms in Canada, 44 in Great Britain, 14 in France, and 9 in Germany. There is an increasing tendency towards globalisation of law firms.
Due to their size, the U.S.- and U.K.-based law firms are the most prestigious and powerful in the world, and they tend to dominate the international market for legal services. A 2007 research paper noted that firms from other countries merely pick up their leftovers: "[M]uch of the competition is relatively orderly whereby predominantly Australian, New Zealand, and Canadian firms compete for business not required by English or American law firms."
Recession
As a result of the U.S. recession in 2008 and 2009 many U.S. law firms have downsized staff considerably, and some have closed. The Denver Post reported that major law firms have cut more than 10,000 jobs nationwide in 2009. On February 12, 2009, Bloomberg reported that 700 jobs were cut that one day at law firms across the country. Among the firms closed included Heller Ehrman, a San Francisco-based firm established in 1890 and Halliwells of the UK. Among those that survived, law firm layoffs became so common that trade publications like American Lawyer produced an ongoing "Layoff List" of the law firms nationwide that cut jobs.
Salaries
Law firm salary structures typically depend on firm size. Small-firm salaries vary widely within countries and from one country to the next, and are not often publicly available. Because most countries do not have unified legal professions, there are often significant disparities in income among the various legal professions within a particular country. Finally, the availability of salary data also depends upon the existence of journalists and sociologists able to collect and analyze such data. The Association of Legal Administrators (ALA) produces an annual study on Law Firm Compensation and Benefits, and can be found at http://alanet.org/compsurvey
United States
The U.S. is presently the only country with enough lawyers, as well as journalists and sociologists who specialize in studying them, to have widely available data on salary structures at major law firms.
In 2006, median salaries of new graduates ranged from US$50,000 per year in small firms (2 to 10 attorneys) to US$160,000 per year in very large firms (more than 501 attorneys). The distribution of these salaries was highly bimodal, with the majority of new lawyers earning at either the high end or the low end of the scale, and a median salary of US$62,000. In the summer of 2016, New York law firm Cravath, Swaine & Moore raised its first-year associate salary to $180,000. Many other high-end New York-based and large national law firms soon followed.
The traditional salary model for law firm associates is lockstep compensation, in which associate salaries go up by a fixed amount each year from the associate's law school graduation. However, many firms have switched to a level-based compensation system, in which associates are divided into three (or sometimes four) levels based on skills mastered. In 2013, the median salaries for the three associate levels were $152,500, $185,000 and $216,000 among large firms (more than 700 lawyers), and $122,000, $143,500 and $160,000 among all firms.
Some prominent law firms, like Goodwin Procter and Paul Hastings, give generous signing bonuses (e.g., $20k) to incoming first-year associates who hold JD/MBA degrees.
Another way law firm associates increase their earnings and /or improve their employment conditions is through a lateral move to another law firm. A recent survey by LexisNexis, indicated that over 95% of law firms consulted intended to hire lateral attorneys within the next two years. Though the success for both the attorney and the law firms in lateral hiring has been questioned. The National Law Review reported that the cost of recruiting, compensating, and integrating a lateral attorney can be upwards of $600,000 and that 60% of lateral attorney hires fail to thrive at their new law firms.
United Kingdom
British firms typically practise lockstep compensation. In London, entry-level solicitor salaries (NQ - Newly Qualified) are typically: (i) £38,000-54,500 at niche and boutique firms (ii) £61,000-65,500 at national firms (iii) £65,000-105,000 at international firms.
A senior associate with six years' experience may make £68,000-120,000 at a national firm or upwards of £160,000 at a global firm. Salary levels are lower in areas outside London.
Australia
Australia has regional variation in lawyer salaries, with the highest salary levels in Sydney, followed by Melbourne, Perth, Brisbane, then Adelaide. Salaries vary between top-tier, mid-size, and small firms. At top-tier firms in Sydney, salaries of lawyers who have been admitted to practice range from $75,000 to $92,000 and partners make on average $1,215,000. In Sydney, mid-tier starting salaries for admitted lawyers range from between $65,000 and $82,000 Most Australian lawyers are not admitted until 10 months into their time at their law firm, since the initial period involves supervised legal training before admission is granted.
Typically in Australian firms lawyers are in a lock-step system for the first two years of practice, following which pay increases are dependent on performance assessed, in large measure, by satisfaction of billable hour targets.
Hong Kong
Newly qualified associates at leading firms in Hong Kong typically make HK$840,000 to HK$948,000, with partners in the HK$1.6 million to HK$4 million+ range; many firms pay New York salaries with cost of living adjustments.
Singapore
At local firms in Singapore, associates in their first three years typically make $60,000 to $100,000, while midlevel (4-7 years) associates make $110,000 to $180,000 and senior (8+ years) associates make $160,000 or more. International firms pay significantly more, with senior associates often making more than $250,000.
India
There is more information available for entry level lawyers. First year lawyers earn anywhere between INR 25,000 to INR 1,10,000 a month. Tier 1 law firms provide the best pay package, of about INR 15,00,000 a year. There is wide difference in the salary range in big cities like Delhi and Mumbai as opposed to other cities like Hyderabad and Kolkata.
Location
Most law firms are located in office buildings of various sizes, ranging from modest one-story buildings to some of the tallest skyscrapers in the world (though only in 2004, Paul Hastings was the first firm to put its name on a skyscraper).
In late 2001, it was widely publicized that John C. Dearie's personal injury plaintiffs' firm in the state of New York has been experimenting with bus-sized "mobile law offices." The firm insists that it does not "chase ambulances". It claims that a law office on wheels is more convenient for personal injury plaintiffs, who are often recovering from severe injuries and thus find it difficult to travel far from their homes for an intake interview.
Rankings
As legal practice is adversarial, law firm rankings are widely relied on by prospective associates, lateral hires and legal clients. Substantive rankings typically cover practice areas such as The American Lawyer's Corporate Scorecard and Top IP Firms. Work place rankings are directed toward lawyers or law students, and cover such topics as quality of life, hours, family friendliness and salaries. Finally, statistical rankings generally cover profit-related data such as profits per partner and revenue per lawyer.
In an October 2007 press conference reported in The Wall Street Journal and The New York Times, the law student group Building a Better Legal Profession released its first annual ranking of top law firms by average billable hours, pro bono participation, and demographic diversity. Most notably, the report ranked the percentages of women, African-Americans, Hispanics, Asian-Americans, and gays & lesbians at America's top law firms. The group has sent the information to top law schools around the country, encouraging students to take this demographic data into account when choosing where to work after graduation. As more students choose where to work based on the firms' diversity rankings, firms face an increasing market pressure in order to attract top recruits.
In popular culture
A number of television shows have revolved around relationships occurring in fictional law firms, highlighting both public fascination with and misperception of the lives of lawyers in high-powered settings.
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