Brexit May Make German Lawyers Say Auf Wiedersehen to LLPby
Law firms may have to trade LLP for Partnerschaftsgesellschaft
U.K. structure also gives attorneys tax, liability advantages
When the U.K. says goodbye to the European Union, German lawyers may have to say auf Wiedersehen to a familiar bit of Britain.
Noerr LLP is one of many law firms that registered in the U.K. for the Limited Liability Partnership designation as an alternative to the German Partnerschaftsgesellschaft, which is a bit of a Teutonic tongue twister for non-native speakers. In addition to liability and tax issues, the change at Noerr was prompted by the fact that clients in Asia and elsewhere were often puzzled by their then required appendix: PartG.
"Clients were asking: What kind of animal is that? Is it like a partnership or an LLP?" said Tobias Buergers, a Noerr partner in Munich. "We often had to explain the differences at great length. So we were looking for an alternative that’s easier to understand internationally."
Noerr and other firms may have to return to less recognizable acronyms because the U.K.’s vote last year will likely destroy the financial and legal advantages of using the British model. German law firms and the LLP is yet another example of the thousands of unforeseen problems the split will cause businesses of all sorts.
Noerr was the first major German firm to become an LLP in 2010 when it opened a London office. The attorneys took advantage of EU principles that required Germany to recognize corporations established under the rules of any EU member state. More than 150 German law firms are now registered as LLPs as of Jan. 1, according to the German Bar Organization.
While Noerr has 16 offices in 11 countries, even smaller firms in medium-sized cities have opted for it, like SQR Rechtsanwaelte LLP in Braunschweig. Using the British set up was also a part of their recruiting strategy, said SQR partner Thies Vogel.
"We were looking for a modern appearance to attract legal talent and that was part of it," Vogel said. "If you want to survive in today’s market, you need to have a clear idea of what law firm you want to be and how to show it."
German lawyers were also drawn to the British LLP because it allows them to limit their financial liabilities to a much wider extent without losing tax advantages than under German structures, said Markus Hartung, director of the Hamburg-based Bucerius Center on the Legal Profession. In combination with German law, the individual partners are practically exempt from liability, bringing together the best of both worlds, he said.
London Letter Box
"You can use the LLP even if you have nothing but a letter box in London," said Hartung. "But that only works as long as Great Britain is a member of the EU."
Raue LLP, a Berlin firm with more than 60 attorneys, became a U.K. LLP when it split from U.S. firm Hogan & Hartson LLP. They wanted to keep the limited-liability structure that they enjoyed with their American colleagues, said Hans Seiler, a partner at the firm.
Once the U.K. leaves, law firms that have their main operations in Germany will no longer be able to use British rules to trump local law. They will likely will be viewed as simple partnerships, according to Hartung, with the "pretty tough" result that each partner is personally liable for the firm’s debts.
Hartung said lawyers could avoid that result by changing into a PartGmbB -- a legal entity Germany created in 2013 to counter the LLP boom. Since the PartGmbB didn’t offer all the advantages of its British counterpart, it couldn’t really compete with the U.K. designation even after market leaders like Hengeler and Gleiss embraced it.
GmbH vs. U.S. LLP
Raue is currently looking into various options, including calculating tax effects of changing into a GmbH, the German limited liability corporation, said Seiler. While it could theoretically also become a U.S. LLP, which is protected under an agreement between Germany and the U.S., that set-up is too complicated.
All German law firms that are incorporated as as British LLP have to mull their options.
"We will have to ponder that decision this year," said Noerr’s Buergers. "We should resolve things by the end of 2018."
Not everybody is ready to say cheerio to the LLP, however. Another Berlin law firm, Hyazinth LLP, opted for the U.K. incorporation despite the Brexit concerns when it opened Jan. 1.
For Hyazinth, the decisive point was that the LLP allows much more leeway in devising internal governance rules, said Thilo Ullrich, one of the founding partners. No German alternative offers as much flexibility when it comes to organizing the relationship among the partners, he said.
Still, Hyanzinth will monitor what others do in response to Brexit.
"We do expect there will be some sort of solution, since there’s quite a number of firms that will be affected" said Ullrich. "Maybe Ireland will open up its LLP for lawyers. That could indeed be an escape."