Nearly half of law firms now set up as corporate entities

The number of law firms in the UK as a whole has remained stable at around 12,000 but the business model has changed rapidly since the entry into force of the Legal Service Act, recent research has found.

Almost half of UK law firms are now set up as corporate entities rather than partnerships, and in England and Wales alone, nearly 1,300 law firms operate as alternative business structures (ABS). 

The figures, detailed in IRN’s latest legal market report, match the Law Society’s own findings last year that partnerships now only account for 45 per cent of business structures in England and Wales, down from 60 per cent in 2013.

Separately, most recent data from the Solicitors Regulation Authority show that, of a total of 10,383 firms, only 15.9 per cent were traditional partnerships, with 22.5 per cent set up as limited liability partnerships.

Overall, revenues in the UK’s legal services sector increased 6.3 per cent before inflation to reach £35.1bn last year. 

Taking inflation into account, however, growth was just 3.7 per cent, with the top 100 firms continuing to perform better than the rest.

The increase in revenue in top tier law firms has been the result of acquisitions, IRN says, the fact that most of their work is in the corporate sector – which has performed better than the consumer sector – and because a significant percentage of their revenue is generated overseas.

Business and commercial work including commercial property accounted for almost half of total market revenue in 2018 (nearly 47 per cent). 

Within this segment, most of the high-value work is undertaken by larger law firms. 

In the consumer segment, personal injury, including accident and medical negligence, contributed the largest revenue with an estimated 11 per cent of UK market revenue. This was despite a fall in claim numbers and the ban on referral fees, IRN reports.

However, the majority of firms working in consumer law have experienced volume growth in their practice area, with more than six in ten firms also expecting volume growth in their practice area. 

Almost three quarters of family lawyers (74 per cent) expect an increase in volume next year. 

The move by more litigation funders into smaller cases, including consumer cases, could provide a further drive for growth at the lower end.

But overall demand for professional advice is likely to decrease in the next 12 to 18 months, IRN predicts. This will be due in part because of the government’s drive to make more online tools available to consumers, encouraging more people to resolve their legal problems themselves – a move likely to be compounded by the increase in the small claims limit in 2020. 

IRN also expects that freelance solicitors and the possibility for solicitors to work in unregulated practices, introduced in the new SRA handbook, will widen consumer choice. Aside from concerns over professional standards, this could also put downward pressures on fees. 

The research consultancy also predicts that more law firms and other legal services providers will look for a public listing and that more law firms will morph from being purely legal services providers to becoming professional services companies. 

So far this trends has been noticeable primarily in the personal injury sector, with firms expanding into areas such as accident management, insurance, and medico-legal services. But IRN says this is now beginning to happen with smaller law firms, who are joining forces with other professional services organisations such as accountants and estate agents.