Definition of an alternative business structure
To get some clarity about what an alternative business structure is, let’s start with a definition. An alternative business structure (ABS) is a departure from the traditional law firm model and a new way of providing legal services, which allows non-lawyers to own legal practices. Here are some of the key differences between an alternative business structure and a law firm:
- Ownership: in a law firm, only lawyers are allowed to own the firm, but in an ABS, the owners do not need to be lawyers. This has certain economic advantages, such as more opportunities for debt and equity raising.
- Services: Law firms only provide legal services, whereas ABS companies offer both legal and non-legal services.
- Fee structures: Law firms typically use hourly billing, while ABS companies often have alternative fee structures, including fixed rate fees or contingency fees based on performance, such as ‘no win, no fee’ offers.
- Range of services: ABS providers usually offer a broad scope of services, which saves clients the effort of going to several professional service providers.
The alternative business structure model aims to improve access to legal services by making them more convenient, affordable and transparent.
Overview of legal practice types
Before we delve deeper into what an alternative business structure is, let’s look at the four main structures of legal practices in Australia:
1. Sole practitioner
A sole practitioner is someone who practices law on their own. For example, all barristers are sole practitioners. They have full ownership and control over their legal practice. The set-up costs are lower compared to other law firm structures, and taxation is generally less complex.
2. Partnership
A partnership is a law firm that is owned and run by two or more legal practitioners. The partners decide on their individual responsibilities, capital contributions and sharing of profits and losses.
3. Incorporated legal practice
An incorporated legal practice is a company under the Corporations Act. This means that it must comply with the same rules and regulations as other companies and must register with the Australian Securities and Investments Commission (ASIC). Unlike other law firm structures, non-lawyers can become the owners of incorporated legal practices. This type of legal practice is known as an alternative business structure.
4. Community legal service
A community legal service operates on a non-for-profit basis and provides legal or legal-related services to people who are disadvantaged in accessing the legal system.
Background
In the 1990s, Australia became the first country to introduce the alternative business structure, with the goal of creating a more competitive market for legal services. The UK then followed suit, adopting a similar approach in 2007 with the Legal Services Act. In 2015, several Canadian provinces passed laws to allow limited non-lawyer ownership of legal services.
Once a legal practice has incorporated, there may be no limits on the types of business activities it can conduct and anyone is allowed to own shares in the company, including non-lawyers. This usually means that the company can go public. However, lawyers may still be required to be involved in and supervise many of the activities that ABS legal practices carry out. And there are still rules in Australia about who can call themselves a lawyer.
This new way of providing legal services continues to gain popularity due to a need for innovation in the industry. Another consideration is that partnership at a law firm is becoming a less desirable career goal for lawyers. Potentially in part due to a shift in our relationship with work brought about by the pandemic, lawyers today are placing more and more value on work-life balance. Law firm partners take on considerable responsibility and often work very long hours.
The ABS model isn’t without its criticisms. One of the major concerns about departing from the traditional law firm structure is that it would weaken the core values of the legal profession by turning law into just another commercial activity. Some argue that shareholder agendas could threaten access to justice.
Benefits for clients
The introduction of ABS legal practices has brought several benefits for Australians seeking legal services, including:
More competition
Allowing non-lawyers to own legal practices creates more competition in the market. The aim is that more competition results in lower prices, higher quality and better customer service as companies vie for new customers.
More convenience
In addition to legal expertise, ABS companies often provide other related services. This can include anything from financial planning and help to prepare financial statements to in-house social work services. By offering a range of services under one roof, ABS companies can offer greater convenience for clients.
Tech-enabled services
ABS providers tend to be more innovative than traditional law firms in their use of technology. They often incorporate online portals, document automation and machine learning into their service delivery. This also increases affordability and convenience for the customer.
Pros of an ABS for owners
If you’re considering establishing an ABS company, it’s important to weight up the pros and cons before you dive in. Here are some of the pros:
1. Tax benefits and income deferral
An ABS can offer significant tax benefits. For example, as the owner of an incorporated legal practice, you may be able to pay less tax as you are not required to claim all the business’s profits as income. This means that you can leave some funds in the business and pay the lower corporate tax rate instead of the higher personal tax rate.
2. Limited liability
Under the ABS model, shareholders are legally separate from the company, which means that they are generally not personally liable for any claims against the company. This provides a layer of protection for shareholders.
3. Enhanced credibility
Incorporating your business rather than operating as a sole proprietor could help it to appear more professional and sophisticated. This could open up more opportunities to receive grants and financing, as many banks and investors may be more willing to offer certain funding to an incorporated business.
Cons of an ABS for owners
Here are some of the cons of operating an ABS for you to consider:
1. Additional costs
An ABS is more complex from a legal perspective, so there are some additional costs to be aware of if you intend to start this type of business. These include initial filing costs as well as ongoing legal and accounting expenses.
2. Extra paperwork
Running an ABS legal practice also comes with a range of additional administrative tasks. For example, you will need to submit various end-of-year documents and file a corporate tax return and the annual return. There are also some record-keeping requirements, including the articles of incorporation, information about meetings and registers of directors, officers and shareholders or members.
3. No personal tax credits for losses
As a shareholder of a sole proprietorship or partnership, you can personally claim any business losses against your personal income. But after incorporating, any losses stay within the business. Although, you may be able to carry forward losses and deduct them against future profits.
An alternative business structure is a way of structuring a legal practice that allows ownership by non-lawyers. This has resulted in a major shake-up of the legal industry as it has paved the way for greater competition and innovation. Operating under an ABS offers significant tax, financial and legal benefits as an owner. Despite concerns about commercial interests compromising the core values of the legal profession, the alternative business structure has become an increasingly popular model for the delivery of legal services in Australia.
